7SSMM807: Credit Ratings

SECTION A - Answer only TWO questions

Question 1

Discuss how a synthetic securitisation transaction is put together and what are the differences with a true sale securitisation? [45 marks]

Question 2

Discuss the credit risk assessment of sovereigns. [45 marks]

Question 3

Discuss the credit risk assessment of banks. [45 marks]

Question 4

Discuss the different ways that default probabilities can be estimated. [45 marks]

SECTION B - Answer ALL questions

Question 5

The Credit Default Swap (CDS) spread for 3-, 5-, and 10-year instruments is 70, 80 and 120 basis points (bps) and the expected recovery rate is 60%. Calculate the following:

a) The average hazard rate over the 3-year period;

b) The average hazard rate over the 5-year period; and

c) The average hazard rate over the 10-year period. From your estimates of a), b) and c) estimate:

d) The average hazard rate between year 3 and year 5; and

e) The average hazard rate between year 5 and year 10. [10 marks]