The Handbook of Credit Portfolio Management (McGraw-Hill Finance & Investing)

As the credit bubble fallout plagues the institutional finance sector—and will continue to do so in coming years—a strategic approach to credit portfolio management has never been more critical. The Handbook of Credit Portfolio Management provides all the information you'll need to successfully rebalance and manage your credit portfolios. Together with co-author Christian Hoppe and a team of thirty-five international contributors, Greg N. Gregoriou provides strategies for calculating risk-weighted assets, reevaluating hedging strategies, and implementing Basel II standards. Providing a thoroughly global perspective of the subject, this comprehensive guide includes input from Moorad Choudhry (Group Head of Treasury at Europe Arab Bank plc, London); Christophe Godlewski (Université Louis Pasteur in Strasbourg, France); Roland Fuss (University of Freiburg, Germany); and Valerio Potí (Trinity College in Dublin, Ireland), who shed light on such key topics as: Investment opportunities of hedge funds Basis arbitrage trading strategies Issues regarding securitization of a sector basket Cost-saving aspects of portfolio hedging with credit futures The Handbook of Credit Portfolio Management covers the latest developments and most current portfolio management techniques to help you implement strategies that best suit your institution's needs. Contents 9 Foreword 17 Editors 21 Contributors 23 Part One: Performance Measurement 35 Chapter 1 Implementing Credit Portfolio Management 37 Introduction 37 The Levers of Credit Portfolio Management 39 Organization of Credit Portfolio Management 43 Quantitative Methods in Credit Portfolio Management 48 Conclusion 51 References 52 Chapter 2 Credit Portfolio Management: Accounting Implications 55 Introduction 56 International Financial Reporting Standards 57 Conclusion 70 Acknowledgments 71 Chapter 3 The New Basel Capital Framework (Basel II) and Its Impact on Investment Decisions: An Overview 73 Introduction 74 The Basel Accord’s General Principles 74 Selected Amendments in Basel II 77 Regulatory Treatment of Shares in a Fund according to Basel II 90 Outstanding Issues 94 Relevant Developments within Other Fields and Conclusion 96 References 98 Chapter 4 Basel II Expected Loss as a Control Parameter 101 Introduction 101 Discussion: Use of EL in Risk Management 102 Summary and Outlook 111 Chapter 5 Credit Risk Capital Allocation and Performance Measurement in Banking Institutions 113 Introduction 113 Credit Risk Capital 116 Capital Allocation, Cost of Capital, and Performance Measurement 119 Credit Risk Capital Measurement 121 Final Remarks and Directions for Future Research 124 Acknowledgments 125 References 126 Part Two: Evaluation of Credit Risk 131 Chapter 6 Characteristics of Credit Assets and Their Relevance for Credit Asset Management 133 Introduction 133 Credit Types 135 Credit Purpose 145 Conclusion 155 References 156 Chapter 7 Default Dependency Modeling: An Introduction to Theory and Application 157 Introduction: Default Dependency 158 Modeling Default Dependencies 159 Measuring Credit Risk of CDOs 169 Conclusion 176 References 177 Chapter 8 A Credit Contagion Model for the Dynamics of the Rating Transitions in a Small- and Medium-Sized Enterprises Bank Loan Portfolio 179 Introduction 180 Counterparty Risk and Credit Contagion Models 181 Modeling Credit Contagion and Rating Transitions in a Portfolio of Bank Loans 183 Simulation Analysis of Rating Transitions 186 Conclusion 194 References 194 Chapter 9 Copula-Based Credit Rating Model for Evaluating Basket Credit Derivatives 197 Introduction 197 Literature Review 198 The Proposed Model 201 Calibration of the Parameters 204 Estimation Results 207 Pricing Multiname Credit Derivatives 210 Conclusion 213 References 214 Chapter 10 Mark-to-Market Valuation of Illiquid Loans 215 Introduction 215 Building Liquid Generic Curves 216 Building Illiquid Generic Curves 217 The Loan Pricing Algorithm 223 Back Testing 226 Summary 227 References 227 Part Three: Managing Credit Exposure 229 Chapter 11 A Holistic Approach to Risk Management of Credit Portfolios 231 Introduction 231 Portfolio Management in the Context of a Bank's Management 232 Risk Management of Portfolios 233 Conclusion 242 References 242 Chapter 12 How a Revolution in the Loan Sale Process Transformed the Secondary Market and Portfolio Management 243 Introduction 244 Evolution of the Secondary Whole Loan Market 245 Buyers: Smart, Savvy, and Global 245 Sellers: Originators of All Sizes Join In 246 How Buyers and Sellers Engage Online 248 Better Portfolio Diagnostics 252 Comparing the Two Approaches 254 Conclusion: It's a New Day for Portfolio Managers 256 Chapter 13 What Drives the Arrangement Timetable of Bank Loan Syndication? 257 Introduction 258 Determinants of Loan Syndication Timetable Arrangement 260 Methodology and Data 268 Results and Discussion 272 Conclusion 275 References 276 Chapter 14 Credit Default Swap and Other Credit Derivatives: Valuation and Application 281 Introduction 281 Valuation of Credit Derivatives with Several Underlyings 288 Possible Application and Market Outlook 300 Conclusion 301 References 302 Chapter 15 Loan-Only Credit Default Swaps 305 Introduction 306 Growth of LCDS 307 Characteristics of LCDS 308 Summary 309 Reference 310 Chapter 16 Definition and Evaluation of Basket Credit Derivatives and Single-Tranche Collateralized Debt Obligation Swaps 311 Introduction 312 Credit Derivatives on Baskets of Reference Assets 312 Evaluation of Basket Default Swaps and CDOs 317 Quotation by a Single-Factor Model 322 Recent Developments and Models for Evaluating STCDO and Basket Credit Derivatives 330 References 333 Chapter 17 Contingent Credit Portfolio Management: Converting Derivatives Credit Risk into Market 335 Introduction 336 Determining the Credit Valuation Adjustment 336 Application of the CVA 341 Contingent Credit Portfolio Management 351 Part Four: Credit Portfolio Transactions 357 Chapter 18 Strategies of Hedge Funds and Robust Bayesian Portfolio Allocation in Fixed-Income Markets 359 Introduction 360 Fixed-Income Hedge Fund Strategies 361 A Robust Bayesian Portfolio Optimization Approach 367 Fixed-Income Portfolio Allocation Including Hedge Fund Strategies 372 Conclusion 377 References 379 Chapter 19 Characterization of the iTraxx Indexes and the Role of Credit Index-Linked Constant Proportion Portfolio Insurances 383 Introduction 383 The iTraxx Index Family 385 Performance Measurement 390 Credit Index-Linked Constant Proportion Portfolio Insurance 395 Conclusion 399 References 400 Chapter 20 Trading the Credit Default Swap Basis: Illustrating Positive and Negative Basis Arbitrage Trades 403 Introduction 404 Relative Value and Trading the Basis 404 Factors Influencing the Basis Package 406 Trade Examples 413 Summary 428 References 428 Chapter 21 Securitization of Shipping Loans 431 Introduction 431 HSH Nordbank's Rationale for Securitizing Shipping Loans 432 Ocean Star Transaction Structure 432 Cash Flows 435 Loss Determination 436 Ocean Star Portfolio Risk Modeling and Rating Process 436 Investors 441 Conclusion 442 References 442 Chapter 22 How Cheap Is "Zero" Cost Protection? 443 Introduction 444 Contract Mechanics 444 Constructing a Replicating Strategy 445 Major Risks and Sensitivity Analysis 447 Who Might Use It? 453 Conclusion 454 Chapter 23 Managing Country Risk 457 Introduction 457 Who Needs to Worry about Sovereign Risk? 458 Why Do We Need Country Risk Management? 458 Country Risk Assessment 460 Sovereign Ratings 471 Setting Country Limits 472 Country Risk Mitigation 473 Conclusion 474 References 475 Chapter 24 Distressed Credit Assets of German Lending Banks 477 Introduction 478 Conceptual Foundations of Workout Management 480 An Empirical Investigation of Workout Management 486 Conclusion 492 References 493 Index 495 A 495 B 495 C 496 D 498 E 499 F 499 G 500 H 500 I 500 J 501 K 501 L 501 M 502 N 502 O 502 P 503 Q 503 R 503 S 504 T 506 U 506 V 506 W 506 X 506 Y 506 Z 506 As the credit bubble fallout plagues the institutional finance sector--and will continue to do so in coming years--a strategic approach to credit portfolio management has never been more critical. "The Handbook of Credit Portfolio Management" provides all the information you'll need to successfully rebalance and manage your credit portfolios. Together with co-author Christian Hoppe and a team of thirty-five international contributors, Greg N. Gregoriou provides strategies for calculating risk-weighted assets, reevaluating hedging strategies, and implementing Basel II standards. Providing a thoroughly global perspective of the subject, this comprehensive guide includes input from Moorad Choudhry (Group Head of Treasury at Europe Arab Bank plc, London); Christophe Godlewski (Universite Louis Pasteur in Strasbourg, France); Roland Fuss (University of Freiburg, Germany); and Valerio Poti (Trinity College in Dublin, Ireland), who shed light on such key topics as: Investment opportunities of hedge funds Basis arbitrage trading strategies Issues regarding securitization of a sector basket Cost-saving aspects of portfolio hedging with credit futures "The Handbook of Credit Portfolio Management" covers the latest developments and most current portfolio management techniques to help you implement strategies that best suit your institution's needs. As the credit bubble fallout plagues the institutional finance sector - and will continue to do so in coming years - a strategic approach to credit portfolio management has never been more critical. The Handbook of Credit Portfolio Management provides all the information you'll need to successfully rebalance and manage your credit portfolios.Together with co-author Christian Hoppe and a team of thirty-five international contributors, Greg N. Gregoriou provides strategies for calculating risk-weighted assets, reevaluating hedging strategies, and implementing Basel II standards. Providing a thoroughly global perspective of the subject, this comprehensive guide includes input from Moorad Choudhry (Group Head of Treasury at Europe Arab Bank plc, London); Christophe Godlewski (University Louis Pasteur in Strasbourg, France); Roland Fuss (University of Freiburg, Germany); and Valerio Pot (Trinity College in Dublin, Ireland), who shed light on such key topics as: Investment opportunities of hedge funds; Basis arbitrage trading strategies; Issues regarding securitization of a sector basket; Cost-saving aspects of portfolio hedging with credit futures.The Handbook of Credit Portfolio Management covers the latest developments and most current portfolio management techniques to help you implement strategies that best suit your institution's needs. "As the credit bubble fallout plagues the institutional finance sector - and will likely continue to do so in coming years - a strategic approach to credit portfolio management has never been more critical. The Handbook of Credit Portfolio Management provides all the information you'll need to successfully rebalance and manage your credit portfolios." "The Handbook of Credit Portfolio Management covers the latest developments and most current portfolio management techniques to help you implement strategies that best suit your institution's needs."--Jacket Features expertise from an international team of 35 contributors, including Moorad Choudhry, Panikos Teklos, and Tamar Frankel Provides much-needed, timely information for institutional investors and professional portfolio, asset, and hedge fund managers as the fallout from the credit bubble continues to plague the institutional finance sector Includes important discussion of new risk management techniques and standards, including Basel II