Advanced Credit Risk Analysis: Financial Approaches and Mathematical Models to Assess, Price, and Manage Credit Risk

The assessment and effective management of credit risk is fundamental to the success of any financial institution. However, the increasing sophistication of financial instruments, many of which are over–the–counter products, has demonstrated that traditional methods of evaluation of risk are no longer adequate. Even "common practice" now requires advanced methodologies.

"...The first comprehensive and detailed compendium of credit risk models. This book is an absolute must for all the students and risk professionals who need to understand the modern foundations of credit risk management." Michel Crouhy, Risk Management, CIBC

"This is an impressive exposition of credit risk matters. Every angle is investigated: structural models, reduced–form models, credit risk of derivatives, and empirical results are all explained with verve and rigor. This book should be read by all credit specialists who care to venture beyond the obvious." Jamil Baz, Co–Head of Fixed Income Research, Lehman Brothers, Europe

"The measurement and management of credit risk has undergone a revolutionary transformation over the past few years. Advances in credit pricing and risk management models, together with the development of a sophisticated market for credit derivatives, have forced banks and investors alike to re–evaluate their entire approach to credit risk. Didier Cossin and Hugues Pirotte have delivered a timely, comprehensive and well–balanced synthesis of the concepts and models underpinning modern credit management." Guy Coughlan, Head of European Portfolio Research, J.P. Morgan

"This book has assembled the major results on the value of instruments that are subject to credit risk. The coverage is extensive. Therefore it should prove to be a useful text for both practitioners and graduate students who wish to work in this area." Professor Suresh M. Sundaresan, Chase Manhattan Bank Foundation Professor, Columbia Business School

Acknowledgements.

Introduction.
CREDIT RISK PRICING.
Introduction to Modern Credit Risk Pricing.
Merton′s Approach: The Intuition Behind Structural Models.
Subsequent Financial Engineering.
Stochastic Interest Rates and Credit Risk.
Advanced Considerations on Bankruptcy Endogeneity.
Reduced–Form/Mixed Approaches.
CREDIT RISK OF DERIVATIVES.
Swap Credit Risk Pricing.
Credit Risk in Options: Vulnerable Options.
THEORETICAL WRAP–UP AND EMPIRICAL EVIDENCE.
Introduction.
Literature Wrap–Up.
Empirical Evidence.
A PROPOSITION FOR A STRUCTURAL MODEL.
Introduction.
The Pricing Model.
Comparative Statics.
The Practical Implementation and Final Issues.
COLLATERALIZATION, MARKING–TO–MARKET, AND THEIR IMPACT ON CREDIT RISK.
Introduction.
A Structural Methodology for Haircut Determination and the Pricing of Credit Risk with Risky Collateral.
Credit Risk Collateral Control as an Impulse Control Problem.
MANAGEMENT OF CREDIT RISK.
Advanced Management Tools.
Financial Structuring with Credit Derivatives.
Appendix A: Itô′s Lemma.
Appendix B: A Review of Interest Rate Models.
General Bibliography.
Index.

DIDIER COSSIN is Professor of Finance at HEC, Lausanne and Adjunct Professor at The International Institute of Management Development (IMD), Lausanne. He has previously taught at Harvard University (where he won two Derek Bok Awards for excellence in teaching) and was a Fulbright Fellow at the Massachusetts Institute of Technology. He holds a PhD from Harvard University and has also studied at Ecole Normale Supérieure (ENS) and Sorbonne University.

Didier Cossin′s professional experience includes: Goldman Sachs in London, Associés en Finance in Paris and Roussel Uclaf in Japan. He writes and referees for a number of leading journals and has presented papers at many major international conferences. Professor Cossin has also been a consultant or executive teacher to a large number of banks and corporations.

HUGUES PIROTTE is Financial Engineer and co–founder of FinMetrics, a company specialising in consultancy and training in financial risk management, performance measurement and valuation. He holds a PhD from HEC, University of Lausanne, for which he completed a thesis on credit risk, as well as degrees in Banking and Finance and in Business Administration.
Hugues Pirotte also lectures at: HEC–University of Lausanne (The Institute of Banking and Financial Management), the University of Geneva, and at Thunderbird, American Graduate School of International Managament (Geneva). He has published papers in a number of leading journals and presented at international conferences.