Credit Risk Tools: An Overview

This paper presents several Credit Risk tools which have been developed for the Credit Derivatives Risk Management. The models used in this context are suitable for the pricing, sensitivity/scenario analysis and the derivation of risk measures for plain vanilla Credit Default Swaps (CDS), standardized and bespoke Collateralized Debt Obligations (CDO) and, in general, for any credit risk exposed A/L portfolio. In this paper the authors compute the market implied Probability of Default (PD) from market spreads and the theoretical CDS spreads from historical default frequencies.