Unit 10 of 14

Credit derivatives and valuation adjustments

  • 8 lessons
  • Videos 73 to 80

Credit risk enters prices through default events and through the counterparties of a trade. This unit models default and values credit default swaps, credit portfolios and valuation adjustments.

A default intensity gives survival probabilities, and bond values depend on a recovery convention and a pricing measure. The Merton model treats equity and debt as options on the firm's assets. Credit default swaps are valued from premium and protection legs, including accrual on default. Dependence between defaults shapes portfolio and tranche losses. Netting and collateral define counterparty exposure, and the credit valuation adjustment prices counterparty default, including wrong-way risk. Funding, debt, margin and capital adjustments enter one cash-flow ledger that avoids double counting.

Every lesson will be one video. The videos are coming soon, and each lesson page already has the definitions and an example for every key term.

Default models and credit default swaps

  1. Default intensity survival and recovery

    How a default time and its survival function follow from a hazard rate or default intensity, why the recovery convention fixes the default payment, how a defaultable bond is priced, and what the Cox construction states.

    Video 73

  2. Structural credit and the Merton model

    How the Merton structural credit model treats equity as a call and debt as face minus a put on firm asset value, prices both at a terminal default boundary, and separates risk-neutral from physical default probability.

    Video 74

  3. Credit default swap valuation

    How a credit default swap is valued from its premium leg, including accrual on default, and its protection leg, how the par spread balances the two, and when it equals intensity times loss given default.

    Video 75

Default dependence and structured credit

  1. Default dependence and credit portfolios

    How default indicators and their joint law shape a credit portfolio's loss distribution, how a latent Gaussian factor and the Gaussian copula build that law, and what tail dependence measures.

    Video 76

  2. Tranche loss and structured credit

    How a tranche with attachment and detachment points absorbs portfolio loss through the loss waterfall, why tranche loss is a call spread, and why expected tranche loss is an integrated tail.

    Video 77

Counterparty exposure and valuation adjustments

  1. Exposure netting and collateral dynamics

    How signed portfolio values become positive exposure, how netting sets lower exposure through the netting inequality, how a signed collateral balance follows margin rules, and what the margin period of risk adds.

    Video 78

  2. Credit valuation adjustment and wrong way risk

    How unilateral CVA prices the loss at default from the closeout value, collateral and recovery, when it factorizes into expected exposure and default density, and how exposure-default covariance creates wrong-way risk.

    Video 79

  3. Funding capital and margin valuation adjustments

    How a discounted ledger of supplied balances defines FVA, MVA and KVA, how DVA enters with first-to-default ordering, when the XVA terms add to a clean value and how partitioned balances prevent double counting.

    Video 80