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 .

• 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 introduction as well as 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: The course includes 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 .

• Counterparty Credit Risk (CCR): Counterparty credit risk and collateral risk are covered in advanced financial risk management courses . This includes a detailed analysis of the Lehman Brothers case study, which illustrates counterparty credit risk . The role of collateral as a risk mitigation tool is also addressed .