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 tailormade 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 creditlinked 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 productsthe concepts and methodswill 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 its 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
Assignment
End-term exam

: 30%
: 30%
: 40%

Reference Books:
1.
2.

Introduction to Structured Finance: Fabozzi (ISF)

Modeling Structured Finance Cash Flows with Microsoft Excel: A Step-byStep 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 MarketVinod 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 PerspectiveFabozzi
(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
Session 2 & 3

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 DerivativesVinod 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 DerivativesHBS Material
Note on Credit DerivativesHBS Material

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 CDSIStanford 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 CDOCRISIL Document
The Barclays Capital Guide to Cash Flow Collateralized Debt Obligations
CDOsHBS 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
Reading: Ch 7 (Fabozzi)
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)

Synthetic CDO: An IntroductionLaurie 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 Bhringer,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

Creating Structured Notes

Examples of Structured Notes

Reading: Ch 10 (Fabozzi)
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 Bankers Perspective (Mr. Saurabh Bhat 4
sessions)
Rating Agencys Perspective (CRISIL 2 sessions)