Product Description

The credit risk market is the fastest growing financial market in the world, attracting everyone from hedge funds to banks and insurance companies. Increasingly, professionals in corporate finance need to understand the workings of the credit risk market in order to successfully manage risk in their own organizations; in addition, some wish to move into the field on a full-time basis. Most books in the field, however, are either too academic for working professionals, or written for those who already possess extensive experience in the area. Credit Derivatives fills the gap, explaining the credit risk market clearly and simply, in language any working financial professional can understand. Harvard Business School faculty member George C. Chacko and his colleagues begin by explaining the underlying principles surrounding credit risk. Next, they systematically present today's leading methods and instruments for managing it. The authors introduce total return swaps, credit spread options, credit linked notes, and other instruments, demonstrating how each of them can be used to isolate risk and sell it to someone willing to accept it.

Product Details

• Amazon Sales Rank: #382445 in Books
• Published on: 2006-06-12
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 272 pages

From the Back Cover

The credit risk market is the fastest growing financial market in the world, attracting everyone from hedge funds to banks and insurance companies. Increasingly, professionals in corporate finance need to understand the workings of the credit risk market in order to successfully manage risk in their own organizations; in addition, some wish to move into the field on a full-time basis. Most books in the field, however, are either too academic for working professionals, or written for those who already possess extensive experience in the area. Credit Derivatives fills the gap, explaining the credit risk market clearly and simply, in language any working financial professional can understand. Harvard Business School faculty member George C. Chacko and his colleagues begin by explaining the underlying principles surrounding credit risk. Next, they systematically present today's leading methods and instruments for managing it. The authors introduce total return swaps, credit spread options, credit linked notes, and other instruments, demonstrating how each of them can be used to isolate risk and sell it to someone willing to accept it.

About the Author

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.

Customer Reviews

I wish I had this book when I was a business student studying finance
I quite enjoyed this book and recommend it strongly for any business student (BBA or MBA) who is interested in this topic. For finance majors who don't have a firm grip on credit risk and the instruments used to moderate its effects, this is a must read. It is well written, clearly illustrated, and is not excessively technical.

The six chapters are divided into three parts. 1) What is Credit Risk, 2) Credit Risk Modeling, and 3) Typical Credit Derivatives. The introduction and chapter on credit risk are especially helpful to anyone wanting to gain a more nuanced understanding of what credit risk is.

The middle chapters comprising part 2 discuss the Merton model and options in discussing how credit risk can be evaluated and priced. There are appendices that discuss other models. For the purposes of this book, the discussion here is enough. As a primer, it cannot also be the last word in the technical evaluation of the various kinds of risk and there are other books for the more sophisticated audience (as well as journal articles).

Credit Swaps and Collateralized Debt Obligations are discussed in a few flavors each as the typical credit derivatives. Sometimes people get intimidated or confused by derivatives. However, they are simply other kinds of financial mechanisms that create financial obligations depending on some aspect of the performance of some other instrument. You buy or sell them depending on whether you want to lay off risk and variability to someone else or are willing to buy risk in order to collect the premium and add variability to your portfolio.

A good little book for the right audience.

Should be mandatory reading for all financial practitioners
During the course of the last several years, I have had only a passing knowledge of credit derivatives. I have encountered the subject on occasion, but in little more depth than something equivalent to reading, "Credit derivatives are an important component of the modern economy." This book certainly reaches the level expounded in the title, namely being an excellent primer on what they are and the important role they play.
The first chapter explains exactly what credit derivatives are. Using mathematical modeling techniques, an accurate estimate is made of the true credit risk based on the likelihood of partial or total default. This allows the holder of a debt to sell it to someone willing to assume the debt for a price that both agree is reasonable. The seller then gets immediate payment and the buyer has enough margin to make a profit.
After credit derivatives are defined and examples given, precise definitions of credit and credit risk are given. Very sophisticated mathematics is used in the models that describe how the values are derived. Probability theory is also used in the computations, as most of the results are based on the likelihood that the debtor will repay the debt.
This book is not easy to read as you need a significant background in microeconomics and must be able to read and understand formulas. However, it is well worth the effort to read and understand it. Credit derivatives are a very important tool that can be used to generate significant capital quickly, reduce your credit risk or to make significant profits. Like nearly everything else, none of this is possible without the knowledge necessary to do it right. This book will provide that knowledge; I learned a lot while reading it.

A Thorough Grounding on Credit Derivatives
If you are new to the burgeoning credit risk market, this is the book. Anyone who has lent money worries about the risk of default. What to do about that worry is of course a different story. Enter credit derivatives.

Using clear language concisely, the authors explain the basics of the credit market, credit derivatives, how they work and how to use them.

They explain how credit risk valued and measured. Key concepts, such as credit spreads and risk transfer are covered in a thoughtful and thorough fashion. In my reading, I have not found a better explanation of the role of this market and its functions.

Moving into second part of the book, the authors tackle credit risk models, how they can be used to describe and predict risk events. They discuss three approaches: structural models, such as the Merton, Black and Cox; empirical models such as Z-score and reduced form models, such as Jarrow-Turnbull.

Finally the authors describe actual credit derivatives, total return swaps, credit spread options and credit linked notes. They devote two chapters to collateral debt options and credit default swaps.

Obviously this is not a book for a seasoned professional. However, if you are new to this market or perhaps simply worried about the risk of being repaid on some money you have lent this book will provide you with the background and understanding required to deploy credit risk strategies effectively and confidently.