Credit Risk in Derivatives Products

Overview of Derivatives / Major Market Players

Derivative Type

• Exchange-Traded-Derivative (ETD) v Over-The-Counter (OTC)

• Futures v Forwards

• Options

• Exercise: P&L on futures contracts

• Exercise: Futures Strips

• Case studies: Credit Risk Reduction in ETDs

• Margining & Central Counterparties (CCPs)

Exercise: Currency Forward - calculating the forward points

Case study: Hedging with NDFs

The Yield Curve

IRSs

• Understanding the IRS and their use

• Pricing and IRS

• IRSs trading on an OTF/SEF at the CCP

• Exercise: Calculating the P&L

• Exercise: Multilateral netting

Credit Default Swaps (CDS) Overview

• How CDS trade

• Standardisation of contracts for Netting

• Exercise: Bloomberg Pricing and Credit Risk

How Counterparty Risk is Different for Derivatives

Credit Risk

• Default Risk

• Corporate Credit Ratings

• Credit Spread Calculations

• Derivatives and credit risk… Counterparty credit risk

• Exercise: considering credit ratings and credit spreads

Counterparty Risk for IRSs

• Derivatives and Risk Management Course Exercise: calculating the CVA risk for an IRS

• Basic Calculations of CVA (Credit Value Adjustments) and DVA (Debit Value Adjustments)

• Current Exposure, Expected Exposure (EE) and Potential Exposure (PE)

Credit Derivative Spread and CVA

• Exercise: calculating the CVA risk

Adjustments for Funding (FVA)

• Case study: Equity Derivatives Example

ISDA Master Agreements

• How does the Master Agreement work?

• CSA (Credit Support Annex)

Swap Unwinds

• Evaluation of Counterparty Exposure

• Netting and the CCP

• How Compression Works

• Close-Out Netting

• Collateral Transformation and Optimisation

• What if a CCP goes bust?

Collateral Management

• How does Collateral Management work?

• Collateral transfers

• Margin Calls

• Threshold

• Minimum Transfer Amount (MTA)

Cleared, Uncleared and Margin Trades

• MPoR (Margin Period of Risk)

• IM & VM Rules for Uncleared Derivatives

• IM Segregation at a Custodian

• AANA (Average Aggregate Notional Amounts)

• Trade Life Cycle…comparison of OTC trades

Course Quiz

Delegates will take a quiz to cement their understanding. We mark the quiz and finish by discussing any areas you may have found difficult so that you leave with a thorough understanding of the topics covered.

Training Objectives

• Redcliffe Training's Credit Risk in Derivatives Products course teaches Counterparty Risk and how it occurs in Derivatives

• We look at individual derivative types and examine how financial market risk creates credit risk

• Understand how credit risk in Futures is largely mitigated through margining

• Learn what risks remain in the “real world”

• Learn how credit risk occurs in all the major derivative products

• Appreciate how credit risk exposure mitigation can reduce risk - including netting, unwinds, collateral transformation, margins, and trade compression

• Gain knowledge of financial derivatives, credit risk exposure calculations, such as: Expected exposure

• Potential exposure

• CVA and CVX

How Electronic trading strategies through SEFs/OTFs and the CCP have reduced credit risk by over 95% for “cleared trades”

Training Course Summary

Redcliffe Training's credit derivatives course will give you an in-depth understanding of how credit risk occurs in derivative products. Learn how the products work on a practical basis, with illustrations of how counterparty credit risk occurs and how to measure it. Credit mitigation techniques are fully explored in this training.