Extended Viewer
Practical Applications from the Experts - July 2009
categories: Product Documentation, general
Credit Spread Sensitivity
by Key Rate/Node
The new Implied Risky Zero Curve Shift statistic builds upon the current credit analytics within RiskServer and allows users to explicitly shift the zero curve derived from hazard rates given by a particular model (CreditGrades, CDS-based approach, Hull-White bond spread curve approach). This will allow clients to produce credit sensitivities broken down by key rates (similar to interest rate sensitivities by key rates).
The new statistic translates a risky zero curve shift into an equivalent expected loss or credit spread term structure shift. This is achieved by converting hazard rates to a synthetic risky zero curve and applying the shift specified in the statistic (in the case below 1 BP) to this synthetic risky zero curve. The engine than converts this shifted synthetic risky zero curve back to hazard rates and re-prices the instrument as usual using the new set of hazard rates.
In the example below, note the decomposition of CS01 by key rate for 3 bonds - ML is a short term (2/12) floating rate bond, WFC is a medium term (11/16) fixed rate bond, and Resona Bank is a perpetual hybrid bond.
