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CREDIT RISK MODELS

Program

Updated A.Y. 2019-2020

Objectives
The objective of the course is to provide an overview of the major credit risk issues in the banking system, with particular focus on the pricing of credit-related instruments (i.e. loans, bonds, etc) or credit derivatives (such as CDS). An in-depth understanding of the most widespread credit modelling approaches (structural, intensity, etc...) is given. Finally, default correlation and its impact on the credit risk management of a portfolio are also introduced.

Prerequisites
Good knowledge of statistics and mathematics applied to finance
Good knowledge of interest rates and interest rate products
Good knowledge of fundamental asset pricing and no-arbitrage pricing theory
Basic knowledge of stochastic calculus (i.e Brownian motion applied to Black-Scholes model)

Program
The course is divided into 3 sections:
1. CREDIT RISK FUNDAMENTALS
Introduction to credit risk /  Credit-related financial instruments / Credit risk and the financial system / Credit risk components / Sovereign and country risk / Ratings / Introduction to counterparty risk / Pricing of loans, bonds, CDS / Bootstrapping default probabilities
2. CREDIT MODELS
Overview of credit models / Review of stochastic processes / Structural models / Merton model and its extensions / Intensity models with some examples / Hints about rating models
3. PORTFOLIO MODELLING
Default correlation and portfolio concentration / Portfolio models / Vasicek model and Basel regulation / A brief outline of basket products

Exams
The exam consists of a written final test.
The test is structured with a first section of multiple choice questions (worth 25% of the total score) and some numerical exercises (worth 75%).
A set of two (optional) homework tests is provided during the course. Students can earn extra points to be added to the final score.

Teaching material
Lecture notes and references therein for further reading