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After completing this reading, you should be able to:
- Describe a credit derivative, credit default swap (CDS), total return swap, and collateralized debt obligation (CDO).
- Explain how to account for credit risk exposure in valuing a CDS.
Identify the default probabilities used to value a CDS.
- Evaluate the use of credit indices and fixed coupons in pricing CDS transactions.
- Define CDS forwards and CDS options.
- Describe the process of valuing a synthetic CDO using the spread payments approach and the Gaussian copula model of time to default approach.
- Define the two measures of implied correlation: compound (tranche) correlation and base correlation.
- Discuss alternative approaches used to estimate default correlation.

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