Applied Credit Risk Management

This course is based on the belief that analytical methods are best understood by implementing them. It does not only introduce students to the major concepts and instruments for the management of credit risk in both capital markets and banking institutions theoretically but also shows how to implement them employing Excel. Although not always the first choice for some problems, it is the major application used in financial institutions and accessible from almost everywhere. Nonetheless, students are not required to have an excessive prior knowledge in Excel! All applications will be demonstrated and described in class. Furthermore, it will be shown that other statistical packages (e.g. Stata) will provide helpful for an analysis of markets related to credit risk.

Students will become familiar with the products and models used in today’s credit markets such as internal and external ratings, credit default swaps (CDS) and collateralized debt obligations (CDO’s), structural asset value models, and also some concepts of the Basel capital accord. The application of these products and models will be discussed as well as pricing issues for credit risk trading. Additionally the interrelations of credit risk factors in security markets will be analyzed empirically.

Upon completion of the course, you will be able to:

• Perform simple regression analyses, also using forecasting methods
• Evaluate single claim credit risk applying different methodologies such as structural models, ratings, or scoring models
• Estimate the risk of a credit portfolio using default-mode models
• Understand and estimate the price of credit risk
• Understand structured portfolio credit risk and be aware of the implied risks

• Scoring Models
• Structural Pricing Models
• Ratings and Rating Transition Matrices
• Prediction of Default Probabilities
• Portfolio Risk (e.g. Value-at-Risk, Expected Shortfall)
• Credit Default Swaps (CDS)
• Collateralized Debt Obligations (CDO)
• Regulation