Credit Risk Tools An Overview

This document presents several Credit Risk tools which have been developed for the Credit Derivatives Risk Management The models used in this context are suitable for the pricing sensitivity scenario analysis and the derivation of risk measures for plain vanilla credit default swaps CDS standardized and bespoken collateralized debt obligations CDO and in general for any credit risk exposed A L portfolio In this brief work we compute the market implied probability of default PD from market spreads and the theoretical CDS spreads from historical default frequencies The loss given default LGD probability distribution has been constructed for a large pool portfolio of credit obligations exploiting a single factor Gaussian copula with a direct convolution algorithm computed at several default correlation parameters Theoretical CDO tranche prices have been calculated We finally design stochastic cash flow stream model simulations to test fair pricing compute credit value at risk CV R and to evaluate the one year total future potential exposure FPE and derive the value at risk V R for a CDO equity tranche exposure