This lecture introduces you into the basic concepts of credit risk management. We will cover models, which are widely used in practice, as well as theoretical and mathematical concepts.

1. review: BSM and central concepts of continuous time finance 2. widely used interest rate models (Vasicek, CIR, HJM etc.) 3. option based approach to corporate bond pricing and its extensions (Merton, KMV) 4. intensity modelling, the Cox Process (JM,JLT, Duffie Singleton) 5. correlation and portfolio credit risk, CDOs 6. comparative anatomy of 3 credit risk models used in banking 7. credit derivatives 8. regulatory capital allocation of banks

To be held orally.

Björk: Stochastic Calculus. additional literature: F. Black and J. Cox (1976), Valuing Corporae Securities: Liabilities. Some Effects of Bond Indentured Provisions ; Journal of Finance 31 (May), p 351-367. I. Kim, K. Ramaswamy, and S. Sundresan (1993), Does Default Risk iin Coupons Affect the Valuation of Corporate Bonds? A Contingent Claims Model ; Financial Management 22, p 117-131. F. A. Longstaff and E. S. Schwartz (1995), A Simple Approach to Valuing Risky Debt ; Journal of Finance 50, p 789-821. R. Merton (1974), On The Pricing of Corporate Debt. The Risk Structure of Interest Rates ; Journal of Finance 29, p 449-470 Shimko, N. Tejima and D. Van Deventer (1993), The Pricing of Risky Debt when Interest Rates are Stochastic ; The Journal of Fixed Income, September 1993, p 58-66.

Basics in probability theory and stochastic analysis Lecture Advanced Mathematics of Finance