Introduction to Credit Spreads and of the Management of Risk
DESCRIPTION
Theoretically, the changes in yield spreads between risky and risk-free bonds should reflect changing expectations in the likelihood of loss from default, which is determined by variability in the probability of default and expected recovery. Credit spreads reflect the specific nature of an obligation. For instance, secured debt generally has higher credit quality than subordinated debt of the same issuer. Credit spreads also reflect the financial condition of the issuer, the issuer’s industry and the issuer’s home country. This course provides a comprehensive introduction to credit spreads and optimizing the manner in which risk is taken.
TARGET AUDIENCE
- Participants from various areas of the institution whose work entails support of professionals involved in credit analysis or credit risk management.
OBJECTIVES
- Describe the economic process that occurs when a borrower defaults
- Define the term structure of credit spreads and why it exists
- Identify the factors influencing credit spreads
- Define the market approaches to calculating credit spreads
- Calculate the credit spread for a credit risky bond, given a set of assumptions
- Outline a bank’s approach to credit risk management
- Identify areas of the bank involved in credit risk management and their responsibilities
- Define the ways in which a bank limits the risks in traded assets
- Define the variables used to establish the various risk limits
PREREQUISITES REQUIRED
Participants should be comfortable working with numbers and performing simple calculations.
- Workshop introduction
- Instructors’ experience
- Curriculum outline, background and purpose
- Review of mutual objectives
- Role and function of financial risk management
- Major causes and sources of financial risk
- Users of risk management tools (institutions, corporates)
- Evolution of risk management
- Market
- Credit
- Operational
- Liquidity
- Credit Spreads Defined
- Default Probabilities & Recovery Rates
- Historic Default Rates (Moody’s)
- Default Risks
- Credit Spreads - Factors to Consider
- Influences on the Credit Spreads
- Calculating Credit Spreads
- Objectives of Credit Risk Management
- Categorization of Credit Risk
- Operational Issues in Credit Risk Management
- Settlement Risk
- Revaluation Risk
- Major events, causes and outcomes
- Key regulatory bodies and issues raised
- Reducing financial disasters
- Safety of the financial system
- Review of subjects and themes discussed
- Review of objectives
- Final questions and answers
- Complete feedback forms
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