Credit Derivatives

George C. Chacko is an associate professor at Harvard Business School (HBS) in the finance area. He is also a managing director at IFL in New York. Professor Chacko’s work has focused on transaction costs and liquidity risk in capital markets, portfolio construction by institutions and individuals, and the analysis and application of derivative securities. He holds a Ph.D. in business economics from Harvard University and dual master’s degrees in business economics (Harvard University) and business administration (University of Chicago). He holds a bachelor’s degree in electrical engineering from the Massachusetts Institute of Technology.   Anders Sjöman is a senior researcher for Harvard Business School at its Paris-based Europe Research Center. He works across management disciplines throughout Europe, conducting research and developing intellectual material for HBS. He is an M.Sc.-graduate of the Stockholm School of Economics in his native Sweden, and initially specialized in information management and international business.   Hideto Motohashi is a manager in the Financial System Division at NTT COMWARE Corporation. He is currently consulting with financial institutions to help them introduce risk management systems. He completed the Advanced Study Program at Massachusetts Institute of Technology as a fellow. He holds a master’s degree in international management from Thunderbird, the Garvin School of International Management, and a bachelor’s degree in chemistry from Keio University, Japan.   Vincent Dessain is executive director of the Europe Research Center for Harvard Business School, based in Paris. The center he runs works with HBS faculty members on research and course development projects across the European continent. He holds a law degree from Leuven University (Belgium), a business administration degree from Louvain University (Belgium), and an MBA from Harvard Business School.

About the Authors     vii

Acknowledgments     ix

Part I:What Is Credit Risk?      1

1 INTRODUCTION     3

2 ABOUT CREDIT RISK     9

Part II: Credit Risk Modeling     61

3 MODELING CREDIT RISK: STRUCTURAL APPROACH      63

4 MODELING CREDIT RISK: ALTERNATIVE APPROACHES      119

Part III: Typical Credit Derivatives     145

5 CREDIT DEFAULT SWAPS     147

6 COLLATERALIZED DEBT OBLIGATIONS     191

INDEX     247