Structured Finance Course Outline

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Structured Finance

Objectives

Structured Finance is the design of debt, equity and hybrid financing techniques in order to resolve particular issuer or investor problems that cannot be solved by conventional methods. To put it simply, whatever is not available off-the-shelf we can create a tailor-made financial solution which will be called a structured product.

Structured Products originates from the mid-seventies in US when the process of securitization started. From the nineties there had been a deluge of different types of structured securities in the market in the form of credit derivatives and different credit-linked notes. In the early years of this century we have seen the advent of CDOs and other advanced structured products. In the recent past, these structured products have earned a lot of bad name due its linkage with the crisis-laden investment banks in the Wall Street. However, we understand now that it was not the product itself that was to be blamed but the disclosure of the underlying risks and other human elements which were primarily responsible.

This course focuses on identifying situations that call for nonstandard corporate finance solutions and the design and pricing of the situation-specific financing instruments. During the course securitization concept will be discussed in-depth and students will understand the various situations where this instrument or process will be preferred. Credit derivatives and its offshoots will be analyzed at length. In the later stages the advanced products like CDOs and CLNs will be taken up. The course also aims to expose the students the underlying risk-return trade-off and the economics of the products and the solutions. The causes of recent global financial crises will be analysed threadbare and policy level issues emerging from that will be taken up for discussion. The structuring and pricing of the products—the concepts and methods—will also be covered.

Pedagogy

The course will employ cases and original research works as well as classroom lectures and discussions, to offer a hands-on learning experience. We will make use of international as well as domestic examples. Each student will be expected to prepare thoroughly and to participate actively in class discussion. Since it’s an advanced course students will be encouraged to read research articles on the subject in addition to prescribed textbooks. Each student has to write an essay on a related topic to structured products which the instructor will discuss in the class.

Components of Evaluation

Mid-term : 30%

Assignment : 30%

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Reference Books:

1. Introduction to Structured Finance: Fabozzi (ISF)

2. Modeling Structured Finance Cash Flows with Microsoft Excel: A Step-by-Step Guide- Keith Allman (EXCEL)

Session- Planning Session 1&2

 Introduction

 Definition and evolution of Structured Finance  Major Types of Structured Finance Products  Structured Finance in India and globally.  Introduction to Securitization

 What is a Securitized Transaction?  Illustration of a Securitization  Why Entities Securitize Assets

 Benefits of a Securitization to Investors  What Rating Agencies Look at in Rating  Asset Backed Securities

 Description of a Collateral  Prepayments Measures  Defaults & Delinquencies Reading: Ch 1, 4 & 5 (Fabozzi)

A Primer on Structured Finance-Andreas A. Jobst (IMF

Working Paper)

Securitization-- Gary Gorton & Andrew Metrick (NBER Working Paper 18611)

Indian Securitisation Market—Vinod Kothari

The dark side of the moon: structured products from the customer's perspective --Thorsten Hens Marc Oliver Rieger (February, 2009, ISB, University of Zurich)

The Structured Finance Market: An Investor's Perspective—Fabozzi (Financial Analysts Journal, Vol. 61, No. 3 May - Jun., 2005) Case: Enron Oddesy and SPE-HBS Case Study

Video: Enron the Smartest Guys in the Boardroom

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 Financial Crisis in post 2007 era  What caused Financial Crisis in 2007-09  Role of Structured Products in Financial Crisis  Hidden Risks in Structured Finance Market Reading:

Structured Finance and the Financial Turmoil of 2007-2008: An Introductory Overview--Sarai Criado and Adrian van Rixtel (Bank of Spain, Occasional Paper)

The Economics of Structured Finance---Joshua D. Coval, Jakub Jurek & Erik Stafford (HBS Working Paper)

Global Financial Crises and the Future of Securitization- Mathis, Tozzolino & Ramaswamy (HBS Note)

Subprime Meltdown : American Housing and Global Financial Turmoil – Julio Rotemberg (HBS Note)

NY Fed Report on Subprime Securitization

Cases: Bear Sterns and the seeds of the demise-HBS Case Study The Rise and Fall of AIG – Richard Ivy School Case Study Videos: City Uncovered (1-3)

Inside Job (film) Session 4 & 5

 Credit Derivatives

 Documentation & Credit Derivative Terms  Credit Default Swaps

 Credit Default Swap Index  Basket Default Swaps  Asset Swaps

 Total Return Swaps

 Economics of a Total Return Swap Reading: Ch 3 (Fabozzi)

A Beginner's Guide to Credit Derivatives--- Noel Vaillant (Nomura International)

Introduction to Credit Derivatives—Vinod Kothari (Sl. Nos.- 11,12)

Credit derivatives and structured credit: the nascent markets of Asia and the Pacific--Eli M Remolona & Ilhyock Shim (BIS Quarterly Review, June, 2008) An Overview of Credit Derivatives—HBS Material

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Credit Default Swap Index Options--Evaluating the viability of a new product for the CBOE---- Mike Jakola ( Kellogg School of Management, Northwestern University, June, 2006)

Emergence of CDSI—Stanford Business School Material

Case: First American Bank Credit Default Swaps –HBS Case Study

Session 6

 Cash Flow Collaterized Debt Obligations  Family of CDOs

 Basic Structure of a Cash Flow CDO  CDOs and Sponsor Motivation  Compliance Tests

Reading: Ch 6 (Fabozzi)

ABC of CDO—CRISIL Document

The Barclays Capital Guide to Cash Flow Collateralized Debt Obligations CDOs—HBS Material

CLO: A Primer--- Andreas Jobst (LSE Working Paper, 2007) Session 7

 Synthetic Collaterized Debt Obligation Structures  Motivations for Synthetic CDOs

 Mechanics

 Funding Mechanics

 Investor Risks in Synthetic Transactions  Variations in Synthetic CDOs

 The Single-tranche Synthetic CDO

 Summary of the Advantages of Synthetic Structures  Factors to Consider in CDO Analysis

Understanding the Risk of Synthetic CDOs--Michael S. Gibson (Federal Reserve, USA, 2004)

The Normal Inverse Gaussian Distribution for Synthetic CDO Pricing ---Anna Kalemanova, Bernd Schmidy & Ralf Wernerz ( Journal of Derivatives, Spring, 2007)

Issues in the Pricing of Synthetic CDOs--Christopher C. Finger (Riskmetrics Working Paper 2004)

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Synthetic CDO: An Introduction—Laurie Goodman Moody's Approach To Rating Synthetic CDOs

Valuation of a CDO and an nth to Default CDS Without Monte Carlo Simulation--John Hull and Alan White (Journal of Derivatives, 2004) Session 7

 Securitized and Synthetic Money Market Funding Structures  Commercial Paper

 Asset-Backed Commercial Paper  Synthetic-Funding Structures Reading: Ch 5, 6, 34 (Fabozzi)

Synthetic securitization:use of derivative technology for credit transfer---Ian Bell and Petrina Dawson (Standard and Poor, Europe)

Conventional versus Synthetic Securitisation– Trends in the German ABS Market --Dr.Martin Böhringer,Ulrich Lotz, Christian Solbach,Jochen Wentzler (Deloitte & Touche Germany, 2001)

Key issues in structuring a synthetic securitisation transaction--Elizabeth Uwaifo and Mark I Greenberg (Sidley Austin Brown & Wood)

Session 8  Credit-Linked Notes  Description of CLNs  Illustration of CLN  Investor Motivation  Settlement

 Forms of Credit Linking

 The First -to- Default Credit Linked Note Reading: Ch 9 (Fabozzi)

Credit-Linked Notes: A Product Primer---Frank J . Fabozzi , Henry A . Davis , and Moorad Choudhry (The Journal of Structured Finance 2007,Vol. 12, No.4) Effect of Asset Value Correlation on Credit-linked Note Values ----C. H. Hui (International Journal of Theoretical and Applied Finance Vol. 5, No. 5, 2002) Session 8

 Structured Notes

 Structured Notes Defined

 Motivation for Investors & Issuers  Issuance Form and Issuer

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 Creating Structured Notes  Examples of Structured Notes

Anatomy of Structured Finance Market- LE Crabbe, JD Argilagos - Journal of Applied Corporate Finance, (1994)

Structured note markets: products, participants and links to wholesale derivatives markets ---David Rule and Adrian Garratt, Sterling Markets Division, and Ole Rummel, Foreign Exchange Division (Bank of England)

Case : Structured Notes – Dearden Case Study Session 9-11

 Structuring Concepts in Securitization  Creating Asset Side of the Cash Flow  Matching the Liability with the Asset Side  Excel Modeling

Reading: Ch 1-8 (Altman)

Session 12-14

 Case Studies in Structured Finance  Formula One

 Tata Steel CARS

 Refinancing Western Harbour Crossing in Hong Kong  Athens Ring Road

 The Bourland MBS

Session 15-20

 Guest Faculty Sessions

 Structured Finance from Banker’s Perspective (Mr. Saurabh Bhat 4 sessions)

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