Credit Derivatives and Synthetic Structures: A Guide to Instruments and Applications

by Janet M. Tavakoli

The Original Credit Derivatives Bible

This eTextbook edition is a print replica of credit derivatives expert Janet Tavakoli’s finance classic, Credit Derivatives and Synthetic Structures (Second Edition 2001). Tavakoli’s iconic book is referenced by law firms, Congress, and scholarly publications. This electronic version’s text page numbers are identical to those used in public references. The remastered eBook has been optimized for the best possible screen view of the text in its original form and will appear on your reading devices as normal text.

A comprehensive first look at the initial explosion of the credit derivatives market as growing investments and risk management mechanisms.

Credit derivatives revolutionized the financial industry and changed the way banks, institutional investors, and securities traders do business both domestically and globally. Credit derivatives expert Janet Tavakoli explains how these instruments were developed, their relative value, and their tricks and traps. Although this book was published in 2001, it is the only source that explains the various ways these instruments can be mishandled. Almost two decades later, it is as useful as when it was first written. Credit derivatives create opportunities, but they are riddled with pitfalls. Tavakoli explains what works, and more importantly, what does not work. She provides a guide on how to manage and control the various risks using real world examples based on her extensive experience.

Tavakoli describes a wide range of products and valuation techniques that are particularly important in the current market as well as how to manage risks for the essential instruments:

* Language issues for confirmations and term sheets and how to fix them.

* Information Asymmetry and what to do about it

* Total Rate of Return Swaps (TRORS)-receiver and payer motivation, mismatched maturities, balance sheet management, loan TRORS mechanics

* Credit default swaps and options-basis risk, materiality, price adjustments, termination payments, normalized price method, pricing and applications

* Exotic structures

*Asset swap switches

* Synthetic lending facilities

* Prorata default structures

* Basket default swaps

* Basket default options

* Currency convertibility

* Sovereign Credit Default Swaps

* Credit Linked Notes (CLNs)-reasons for CLNs, black box structures, collateralized loan obligations, hybrid securitizations

* Sovereign risk and emerging markets-tax arbitrage, cross border issues, special event risks, pricing convertibility protection

And much more

Genres: Finance, Economics

323 pages, Kindle Edition

First published June 9, 1998

About the author

Finance Expert & Author

Janet Tavakoli is the founder and president of Tavakoli Structured Finance, a Chicago-based consulting firm established in 2003. Internationally recognized as a finance expert, Business Week called her the "Cassandra of Credit Derivatives" for predicting the financial crisis. This profile features her acclaimed nonfiction finance books and business expertise.

Ms. Tavakoli posts topical finance updates at her business site: Tavakoli Structured Finance.

Fiction Writing: Author Janet Tavakoli has written the well-received financial murder mystery Archangels: Rise of the Jesuits. She also writes science fiction using the pseudonym Michael K. Clancy, creating the acclaimed Zombie Apocalypse series. She posts fiction updates at: Janet Tavakoli, Science Fiction and Mystery Author.

Media Recognition: She is frequently published and quoted in financial journals including The Wall Street Journal, The Financial Times, New York Times, The Economist, Business Week, Forbes and Fortune. Television appearances include CBS's 60 Minutes, CNN, C-Span, CNBC, Fox, CBS Evening News, Bloomberg TV, and BBC.

Education: Ms. Tavakoli earned a Bachelor's degree in Chemical Engineering from the Illinois Institute of Technology and an MBA in Finance from the University of Chicago's Booth School of Business, where she served as adjunct associate professor of finance.

Books by Janet Tavakoli

Finance & Business: Credit Derivatives (John Wiley & Sons, 1998, 2001, 2022)

Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2003, 2008): an exposé of grave flaws in the structure, sales practices, and methodology for rating structured financial products.

Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (John Wiley & Sons, 2009): the causes of the greatest credit bubble in the history of the world, how we could have avoided it and how we can prevent it from happening again.

The New Robber Barons (2012): Janet Tavakoli's ongoing chronicle of the global financial crisis captured in her articles from the September 2008 meltdown through February 2012.

Nonfiction: Decisions: Life and Death on Wall Street: Janet Tavakoli's nonfiction account of Wall Street skullduggery.

Unveiled Threat: A Personal Experience of Fundamentalist Islam and the Roots of Terrorism: Janet Tavakoli's autobiographical account.

Fiction: Archangels: Rise of the Jesuits: Janet Tavakoli's financial fiction thriller debut.

Reviews

[May Ling]

I realized half way through that it was my second time reading this book. Still, my understanding in the past was so poor, that the second read was thoroughly enlightening. Tavakoli does an impressive job in making the Credit Derivatives market accessible to laymen. She expertly describes the nature, usage, terms, as well as their regulatory inspiration and their flaws.



I found it very helpful that she included examples of instruments that exist, though they make questionable sense. It really does prove the degree to which ignorance exists despite a well-traded liquid market.



Her incorporation of Basel regulation issues and differences between countries is particularly salient in today's market turmoil. Off-balance sheet transactions and the potential difficulties in monitoring them are at the heart of what is happening today.



I have a feeling, though, that should Tavakoli choose to add another chapter, the current environment would be rife with material. She comes very close to discussing the problems in correlation, and hints at much of what has become the nightmare of banks today. Similarly, you see her discuss the issues with mark to market and the problems given different counter-parties. I'd be intrigued to see what she might have to say in the most recent period.