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CRMM-8-spread-risk-and-default-intensity-models.html
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<!doctype html>
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<title>Credit Risk Measurement and Management | Chapter 8 | Spread Risk and Default Intensity Models</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Chapter 8</h1>
<h3>Spread Risk and Default Intensity Models</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Credit Spreads</h2>
<p><em>Definition: The compensation the market offers for bearing default risk</em></p>
<ul>
<li>Yield spread</li>
<li>i-spread</li>
<li>z-spread</li>
<li>Asset-swap spread</li>
<li>Credit default swap spread</li>
<li>Option-adjusted spread (OAS)</li>
<li>Discount margin</li>
</ul>
<aside class="notes">
The yield spread is the difference between the YTM of a credit-risky bond and that of a benchmark gov't bond. The i-spread is the difference between the yield of a credit-risky bond and the linearly interpolated yield between the two bechnmark gov't bonds or swap rates with maturities flanking that of the credit-risk bond. The z-spread is the spread that must be added to the LIBOR spot curve to arrive at the market price of the bond. The asset-swap spread is the quoted margin on the floating leg of an asset swap on a bond. The credit default swap spread is the market premium of a CDS on similar bonds of the same issuer. The OAS is a variant of the z-spread that accounts for embeded options. The discount margin is a spread concept applied to floating-rate notes.
</aside>
</section>
<section>
<h2>Default Curve Analytics</h2>
<ul>
<li>Default risk for a single company can be represented as a Bernoulli trial</li>
<li>Hazard rate/default intensity - the parameter driving default</li>
<li>Default time distribution function - the probability of default between now and time 't'</li>
<li>Default time density function - the derivative of the default time distribution</li>
<li>Conditional default probability</li>
</ul>
</section>
<section>
<h2>Spread Risk</h2>
<p><em>Definition: The risk of loss from changes in the pricing of credit-risk securities</em></p>
<ul>
<li>Spread volatility - the degree to which spreads fluctuate over time</li
</ul>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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