Credit Risks: practical approach (ENSTA)


This course is designed to provide an introduction to credit risk. It is a course that provides a theoretical framework for credit risk modeling and presents market practices (which can be discussed).

This course takes place at ENSTA. More informations on


The first chapter is a reminder of the notions of arbitrage and self-financed portfolios. Then, the main vanilla credit products will be described, in particular the "loss" products. For each product, an attempt will be made to give one of the market models that can be used to value them. These methods are based on the intensity model for single-issuer products, to which are added copulas allowing to model the joint law between the defaults of several issuers as soon as the marginal laws are calibrated.
Beyond pure credit products, there are more complicated products that combine both credit risk and risks of another nature (such as interest rate or exchange rate risk). Unlike vanilla credit products, there is no market quoting a price for these products. The problem of valuing these products is closely linked to the problem of hedging them. A chapter will be devoted to the hedging of these so-called "defaultable" products.
The last part of the course will give students a taste of the notions of counterparty risk, in particular the different risk measures built around the exposure profile. It will also be an opportunity to introduce Credit Valuation Adjustment (CVA), one of the new concepts that continues to gain importance in the new paradigm of quantitative finance.