Practitioner course in fixed income
Credit Default Swaps
Credit default swaps from the contract to the model: what is protected and paid, hazard rates and survival curves, bootstrapping a CDS curve with the ISDA standard model, index products, and the basis between bonds and CDS.
A credit default swap is insurance on a borrower’s debt, and its spread is the clearest market price of default risk. Banks use credit default swaps to hedge loans, funds use them to take views on companies and countries, and risk teams use their spreads in counterparty and capital models. This course covers the contract, the pricing model and the trades.
How is default turned into a price?
By treating default as a random time with an intensity, the hazard rate. From quoted spreads a desk bootstraps the probability that the company survives to each date, and from those probabilities it prices any credit instrument on that name. The course builds this curve step by step with the industry’s standard model.
How is the course taught?
Audio lessons give the general subject, explainer films show survival curves being built, and the workbooks hold worked pricing examples, notebooks and cheat sheets of market conventions. The curve lab receives written feedback from the faculty.
Who is this course for?
Quants and analysts heading for credit trading, risk or model validation. It counts toward the Certificate in Quantitative Risk Management and so toward the Fellowship in Computational Finance.
What you will be able to do
- Describe the CDS contract, credit events, auctions and the standard coupons and upfront payment.
- Bootstrap a survival curve from CDS quotes and price a CDS with the standard model.
- Measure credit spread and default risk, and hedge a bond with a CDS.
- Explain CDS indices, their tranches and the bond-CDS basis.
Syllabus, module by module
The contract
Protection buyer and seller, credit events, auctions, standard coupons and upfront.
Default as a random time
Hazard rates, survival probabilities and recovery.
Pricing a CDS
Premium and protection legs and the ISDA standard model.
The CDS curve
Bootstrapping survival curves and reading term structures of credit.
Indices and tranches
CDX and iTraxx, index rolls and the idea of a tranche.
Trading and hedging
Credit duration, the bond-CDS basis and counterparty exposure on the swap itself.
How the certificate is earned
Graded problem sets and a final lab: bootstrap a CDS curve for a company and value a position in its bonds and CDS. On a pass you receive the Course certificate in Credit Default Swaps, issued by the Institute with a verification code. Read how certification works.
Before you start
Bond pricing and the yield curve, and probability at foundation level.
This course counts toward
- Certificate in Quantitative Risk ManagementA financial risk management certification in one semester of eleven courses and a capstone on measuring and governing market and credit risk: VaR and expected shortfall, volatility models, stress tests, credit and counterparty risk, bank capital and the validation of the models themselves.
- Fellowship in Computational FinanceThe top credential on the researcher path. Four semesters, 38 courses, and a dissertation supervised in writing and examined by two faculty members.
Questions applicants ask
What is a credit default swap?
It is insurance against a borrower’s default. The buyer pays a regular premium; if the borrower defaults, the seller pays the loss on the debt. Its price, the CDS spread, is the market’s view of that borrower’s credit risk.
Is this course useful for risk roles?
Yes. Credit spreads feed counterparty risk, credit valuation adjustment and capital models. The course leads into Counterparty Credit Risk and CVA and into Copula Models for Credit Risk.