Valuation, modeling and hedging of structured credit products.

Summary This thesis, initiated in November 2005 in the PRISM laboratory, is part of the process of evaluating a new type of financial asset class: credit derivatives. At the end of the 1990s and as a consequence of the Basel regulation, financial institutions were looking for solutions to transfer credit risk off their balance sheet in order to refinance themselves at lower cost. At the same time, investors were looking for more and more complex financial products in order to improve returns. Thus, the asset class of credit structures has imposed itself on the market. These are derivatives that combine securitization techniques and optional features in order to meet the new needs of financial institutions as well as the requirements of investors. The author presents various complex credit derivative structures and analyzes the inherent risks. He then proposes closed-end valuation formulas in cases where these did not previously exist. It should be noted that in most cases, banks use simulation methods to determine prices (a time-consuming approach that is not well suited to the needs of trading rooms). Then, hedging approaches are proposed which aim at controlling the positions concerning financial products whose associated risks were unknown until a short time ago. The first part of the thesis is devoted to the presentation of the economic and market context. In addition, it provides a pedagogical summary of the various quantitative tools and scientific concepts essential to the understanding of credit derivatives. The author then devotes a section to Collateralized Oebt Obligations (COOs), options on COO tranches, COO Squared, Constant Proportion Collateralized Oebt Obligations (CPOOs), and Foreign Exchange Collateralized Obligations (CFXOs). Although initiated three years ago, this work is gaining importance in the current context of the subprime crisis.