Commodities, Derivatives and Structured Products

Credit Derivatives - Part 2 (2022)


This eCourse consists of two modules. Module 1 looks at the construction of credit indices, the mechanics of index swaps, and the market environment. Index swaps allow participants to increase or decrease general credit exposure, although the creation of credit indices has always been directly connected to the trading of index products. There is significantly more liquidity in these products than in single-name CDS transactions.

Module 2 outlines the key calculations in CDS pricing and shows how valuation has coalesced around standard pricing models and simplified assumptions. CDS pricing is theoretically straightforward – whatever is paid as protection premium should be offset by the expected gains from contingent default payments. However, calculating the present values of these payments involves more subtle assumptions about default probabilities and recovery rates. There must also be some method for calculating the fair value of the upfront payments generated by differences between theoretical spreads and fixed coupons.


On completion of this course, you will be able to:
- Identify the main features of credit indices
- Recall how CDS indices are constructed and the key terms of these indices
- Recognise how total return indices replicate the total return on a funded long credit position
- Recall what happens to a CDS index when a credit event occurs on a constituent name
- Recognise the key market dynamics and pricing strategies for CDS indices
- Recall how credit default swap pricing is broken up into the valuation of protection and default streams
- Recognise the importance of the credit triangle in CDS valuation
- Calculate conditional and unconditional default probabilities, survival probabilities, hazard rates, and default intensities
- Identify other CDS pricing factors such as upfront payments, standardized coupons, and recovery rate sensitivity


Module 1: Credit Derivatives – CDS Indices
Topic 1: Overview of CDS Indices
Topic 2: Index Construction & Terms
Topic 3: CDS Index Trading
Topic 4: CDS Market Dynamics & Pricing

Module 2: Credit Derivatives – CDS Pricing & Valuation
Topic 1: Overview of CDS Valuation & Pricing
Topic 2: Credit Pricing Triangle
Topic 3: Default & Survival Probabilities
Topic 4: Other Pricing Factors


Relevant Subject
Type 2 - Dealing in futures contracts
Type 5 - Advising on futures contracts
SFC:2.00, PWMA:2.00
All Member: HK$610
Staff of Corporate Member: HK$610
Non-Member: HK$890