This lesson examines the management of credit risk—the risk of counterparty default—which played a critical role in the global financial crisis. It covers credit risk assessment, credit derivatives, and the regulatory frameworks that govern credit risk, as covered in the NYU Stern MS in Risk Management curriculum .

• Definition and Importance: Credit risk is the risk that a counterparty is unwilling or unable to fulfill its contractual obligations . The objective is to provide an in-depth understanding of issues in credit risk, concepts behind its modeling, and analysis of credit-related instruments such as default-prone debt and credit derivatives .

• Credit Risk Models: Analysis of the Basel II Model, the implications of the standardized and internal ratings-based (IRB) approaches, and issues relating to their implementation. New models and approaches are analyzed including KMV, Creditmetrics, and so-called reduced-form credit risk measurement models .

• Credit Derivatives: Credit derivatives, including credit default swaps (CDS), are examined to understand how and why these products played such a critical role in the financial crisis. The course also covers the new financial sector reforms and their direct or indirect impact on credit derivatives and credit markets going forward .

• Credit Risk Management in Practice: The role of credit risk management includes credit analysis, portfolio diversification, credit enhancement, and the use of credit derivatives to transfer risk. The regulatory framework under Basel II and III establishes capital requirements based on credit risk exposure .