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Credit Derivatives & Synthetic Structures: A Guide to Instruments and Applications, 2nd Edition Hardcover – 2001
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"If you want to know more about credit derivatives-and these days an increasing number of people do-then you should read this book."-Merton H. Miller, winner, Nobel Prize in Economics, 1990; Robert R. McCormick Distinguished Service Professor Emeritus, University of Chicago Graduate School of Business
"Tavakoli brings extraordinary insight and clarity to this fascinating financial evolution. She combines her extensive experience and deep understanding of the derivatives markets with a lucid writing style that makes this an eminently readable volume. This book should set the standard for credit derivatives texts for years to come." -Carl V. Schuman, Manager, Credit Derivatives, WestLB New York
"Tavakoli does a remarkable job compiling a highly readable and much needed guide to instruments and applications of credit derivatives. Using charts, examples, basic investment theory, and elementary mathematics, Tavakoli explains the real-world practice and applications of credit derivative products. Credit Derivatives clarifies often misunderstood concepts and offers a framework with which to analyze derivatives and how to make them work."-Stephen Wade Managing Director, UBS Securities LLC Hei Wai Chan, PhD, Director, UBS Securities LLC
"Tavakoli has written a book that finally demystifies credit derivatives. It is an easy to understand analysis of the many aspects of the basic products used in this new and innovative derivative structure. Anyone in the banking community as well as the sophisticated derivatives professional will find it both useful and insightful."-Randy Allison Kaufman, Managing Director, Bank Boston, Structured Derivatives --This text refers to the Digital edition.
From the Publisher
Description of the Book: Tavakoli demystifies credit derivatives using real-world examples. She explains the full range of instruments and applications and offers detailed guidelines on how credit derivatives can be used as a mechanism for managing global risk. --This text refers to the Digital edition.
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A review posted June 26, 1999 incorrectly claimed I'm the Queen of RAVs, but it's not me. This is a case of mistaken identity.
Frank Partnoy wrote an unflattering portrait of an Iranian woman with whom he worked at Morgan Stanley in his book F.I.A.S.C.O., and called her the Queen of RAVs. Personally, I believe that Partnoy painted an inaccurate picture of her, but to be clear she and I are not the same person. My last name is my ex-husband's Iranian name; I'm USA born and bred and of northern European heritage, and I never worked at Morgan Stanley. Frank Partnoy will be happy to confirm that I am not the woman in his book.
I know two other women that have Iranian last names, worked at major Wall Street firms, and have expertise in derivatives. Coincidence is not the same thing as correlation.
Tavakoli starts with an overview of the markets and then examines specific instruments such as total return swaps, credit default swaps, and options, exotic structures and credit linked notes. Synthetic CDOs are also introduced as is are all-important comments on synthetic equity. Credit arbitrage funds also have a section.
Documentation, booking and legal issues are explained in an entire chapter devoted to this topic. Tavakoli covers documentation asymmetry, which occurs when two counterparties agree on price, but not on particular points of language in the documentation which leads to basis risk. Anyone trading these products is aware of the potential pitfalls, and these sections alone would make this book an essential read.
The book provides only an overview of the various pricing approaches, but discusses the key issues, which revolve around data quality. Particularly irksome are correlation data, default probability data, and data on recovery rates. Traders, marketers, investors, and risk managers who are very quantitative will find this text useful, since it provides a practical guide to pricing in this market. As the author says: "The spread is where the spread is because that's where the market says it is."
In this fast growing and evolving market, this is a pragmatic and theoretically sound approach to the market. This book is an essential addition to the finance library of anyone trading or wanting to learn more about credit derivatives.
This book is not about is the mathematical and statistical details in credit risk/portfolio modeling, but Tavakoli does a good job of highlighting various aspects of modeling (such as data availability, limitations of different approaches, etc.). For example, Tavakoli's explanation of first-to-default baskets provides a quantitative explanation of boundary conditions and a qualitative explanation of the products.
The clear, qualitative, conceptual explanations are supported by explanations that show a deep understanding of the underlying mathematics. Numerically minded readers will grasp this, but even those who are a bit numbers shy will find the quantitative examples easy to follow. Tavakoli's book enabled me to discuss the assessment and deployment of quantitative models on an even footing with professional risk managers and the rocket scientists developing these models.
I also recommend Phillip Schonbucher's book on credit derivatives for people who need to model credit derivatives. Unfortunately, the resource doesn't exist that can solve the tough problem of estimating correlation between defaults.
Tavakoli wisely devotes a good deal of attention, then, to what names are and should be given to what things.
She begins her discussion of credit default swaps, for example, by discussing the standard terminology. "If the fee is paid up front, which may be the case for very short dated structures, the agreement is likely to be called a credit default option. If the fee is paid over time, the agreement is more likely to be called a swap."
She disagrees with this habit. She would prefer to call a swap only if the parties are actually exchanging the credit default list of two different credits. Otherwise, "cash flows paid over time are nothing more than an amortization of an option premium."
She explains why the usage that over-stresses that amortization came about. Its because the desks at many banks where this work is done are occupied by former interest-rate-swap staff, so the ISDA terminology persists.