Credit Risk Modelling

The course Credit Risk Modelling, is a course within the Master of Science programmes at the Graduate School, School of Business, Economics and Law, University of Gothenburg.

To be eligible for the course Credit Risk Modelling the participant must fulfil the entrance qualifications for the Master of Science programme in Finance or Economics. For programme specific entrance requirements, see programme syllabus.

The participant must also have been registered on the courses Quantitative Finance, Investments, Mathematics, Graduate Econometrics and Financial Econometrics. Students with a proven extensive mathematical and statistical background may also be eligible for the course.

Credit risk is the largest and most important risk any financial institution faces. The recent credit crises are striking proof of this fact. This course covers different topics in credit risk modeling; more specifically the topics are:

• Structural Models (Firm Value models): The Merton model
• Markov processes in credit risk, Markov Chains, Markov jump processes. The matrix-exponential and its properties, ratings etc 
• Intensity based models in credit risk models.
• Pricing defaultable bonds using intensity based models
• Static credit portfolio models and their use in risk management computations such as Value-at-Risk and Expected shortfall
• The Credit Default Swap (CDS).
• Modeling and pricing a CDS
• The Index CDS and basket default swaps (k-th-to default swaps)
• Modelling and Pricing an index CDS and basked default swaps
• Basel III, Conterparty credit risk, credit value adjustment and related issues

After completion of the course, the student shall be able to:

1. describe and explain firm-value models (such as e.g. Merton's model) and apply these models to solve practical problems within credit risk related issues
2. describe and explain intensity-based models and apply them to solve practical problems within credit risk related issues
3. describe and explain static portfolio credit risk models and apply these models to risk-management measures such as e.g. Value-at-Risk and Expected Shortfall
4. describe and explain credit derivatives and apply credit risk models to calculate quantities related to these derivatives.

The teaching consists of lectures, exercises, question hours, quizzes and computer labs. In the course hand-in assignments are given where the student uses programming in Matlab to implement different models in order solve practical problems within credit risk related issues.

Language of instruction: English

The learning outcomes are assessed through assignments and a written exam.

Exams shall be written individually, cooperation in formulating text, tables, figures etc. is not allowed.

A failed assignment can be supplemented to a Pass grade.

If a student who has been failed twice for the same examination element wishes to change examiner before the next examination session, such a request is to be granted unless there are specific reasons to the contrary (Chapter 6 Section 22 HF).

If a student has received a certificate of disability study support from the University of Gothenburg with a recommendation of adapted examination and/or adapted forms of assessment, an examiner may decide, if this is consistent with the course’s intended learning outcomes and provided that no unreasonable resources would be needed, to grant the student adapted examination and/or adapted forms of assessment.

If a course has been discontinued or undergone major changes, the student must be offered at least two examination sessions in addition to ordinary examination sessions. These sessions are to be spread over a period of at least one year but no more than two years after the course has been discontinued/changed.

The number of examinations is limited to five.

If a student has been notified that they fulfil the requirements for being a student at Riksidrottsuniversitetet (RIU student), to combine elite sports activities with studies, the examiner is entitled to decide on adaptation of examinations if this is done in accordance with the Local rules regarding RIU students at the University of Gothenburg.

The grading scale comprises: Excellent (A), Very good (B), Good (C), Satisfactory (D), Sufficient (E) and Fail (F).

Pass is required on all examination forms. The grade (A-E) corresponds to the total score a student obtains on the assignments and the written exam. To receive a pass grade (A-E) >= 50% points is required. The scale is tied to fixed score intervals:

A: 85-100%
B: 75-84%
C: 68-74%
D: 60-67%
E: 50-59%
F: <50%

The course will be evaluated upon completion. The results of and possible changes to the course will be shared with students who participated in the evaluation and students who are starting the course.