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Canada Mortgage and Housing Corporation
Structured Finance & Asset-Liability Management
Prof. Ian Giddy
New York University

What is Structured Finance?
Structured Finance is the design of debt, equity and hybrid financing techniques in order to resolve particular issuer or investor needs that cannot readily be met by conventional financing techniques. A major part of today's structured finance is the use of asset securitization.  ABS (asset-backed securities) and MBS (mortgage-backed securities) constitute an important part of the the tools of asset-liability management.

For more resources see the instructor's websites, and

Participants will be provided with a package of materials useful to the structuring and analysis of specially tailored financing techniques, including pertinent articles, rating agency reports and sample documentation from actual deals done in North America and elsewhere.

Ian Giddy has taught finance at NYU, Columbia, Wharton, Chicago and in 40 countries abroad for the past two decades. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, he has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous corporations and financial institutions in the U.S. and abroad. As a banker and consultant he has been involved in the growth of the ABS market in the USA, Europe and Asia. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance, Global Financial Markets, Asset Securitization in Asia and The Hudson River Watertrail Guide. - resources in finance

Structured Finance is the design of debt or equity financing techniques in order to solve particular issuer or investor problems that cannot be solved by conventional methods.

The Workshop

This workshop will be taught around five major topics employing in-depth group work on case studies, financial analysis and deal documentation. The focus will be on asset-backed securities and the management of fixed-income portfolios with a special emphasis on mortgage-backed securities.

Asset securitization, one of the core techniques of structured finance, constitutes a growing segment of the European and global capital markets. Asset-backed securities are securities which are linked to identified pools of underlying assets. The key lies in segregation of the risk of the asset pool from the risk of the originator.

Recently many financial institutions are looking at using structured finance as a broader tool, including the use of collateralized debt obligations, which match pools of loans or bonds with high-grade funding. A further development is "synthetic" asset-backed securitization, which is part of the burgeoning market for credit risk transfer.

We offer an economic cost-benefit analysis of these techniques, an insight into the legal, accounting, tax and regulatory principles, and the balance sheet risks and how they can be managed using debt and derivatives as tools of asset-liability management.

The workshop will include case studies of actual financings, as well as hands-on exercises, and will give participants the opportunity to demonstrate their understanding of deals through presentations and discussions. 

Key Issues

Some of the issues to be explored:

  • What is structured finance? Why and when should companies consider the use of structured financing techniques?
  • What are the key legal and credit issues surrounding asset-backed financing, and how can they be satisfied?
  • How have developments in the CDO market affected the credit markets?
  • Synthetic ABS: how do they really work, and what are their strengths and shortcomings? How are credit derivatives used in conjunction with synthetics?
  • What role does "duration analysis" play in a pension funds immunization strategy?
  • How can duration, convexity and immunization techniques be applied to a mortgage portfolio?
  • What can these concepts tell us about how mortgage portfolios should be funded?
  • How do equity-linked financing techniques such as convertible bonds work, and when does it make sense to use them? How are they priced?
  • What are the techniques of asset-liability management, and how can they be applied at CMHC?

Outline of Workshop
Date Topics Resources
Day 1 Structured Finance: Effective Cost Analysis and Asset-Backed Securities
  • Introduction to Structured Finance
  • Survey of Structured Finance Techniques, and When it Makes Sense to Use Them
  • Techniques of Effective Cost Analysis
  • Case study: A Day in the Life. Delegates compare the techniques and effective cost of various structured bond issues.
  • The ABS Market and the Securitization Process
  • Case study: Finance Company Ltd. Delegates study an example of a typical ABS structure and cash flows
  • Legal, Tax, Accounting and Disclosure Aspects of ABS
  • Case study: Ford Motor Credit. Delegates dissect the pool quality, legal aspects and cash flow strucuture of a fixed-pool auto loan securitization.
  • Cost-Benefit Evaluation
  • Capital Cost Analysis for Financial Institutions
  • Case study: Canada Enhanced Homes Trust 1. By modelling the cash flows in a securitization, delegates estimate the payback and funding cost structure of a residential mortgage-backed security.
Credit Enhancement and the Rating Process
  • Pool analysis; Seller/originator risk; Servicer performance risk; Swap counterparty risk; Legal risks; Sovereign risk. Originator, servicer, counterparty and manager analysis
  • Techniques of Credit Enhancement: Credit risk management; Overcollateralization; Senior-subordinated structures; Excess servicing and liquidity accounts; Financial guarantees
  • Case study: Atherton. Delegates use this deal to consider the rating process and debate its merits
  • Credit Analysis of Mortgage-Backed Securities
  • Case study: Liberty NZ 2005-1. Delegates examine this residential MBS structure to find the drivers of credit enhancement and ratings transition.
Introduction to ABS

Rating Residential Mortgage-Backed Securities

Day 2  Collateralized Debt Obligations
  • Credit: Understanding Default Probabilities and Recovery Rates
  • Ratings and Historical Loss Rates
  • Using Ratings Loss Tables to Structure Credit Enhancement in ABS
  • CDOs: Collateralized Loan and Collateralized Bond Obligations
  • Cash-Flow and Market-Value CDOs
  • Case study: CDO from Scratch. Using information in the case study and current market data, delegates are set the task of designing an arbitrage CDO.
  • Synthetic Structures, Super-Senior Tranches and the Role of Credit Derivatives
  • Credit Derivatives and Credit-Linked Notes
  • Case study: Noname Bank Synthetic CLO. This deal illustrates the role of credit default swaps in synthetic asset-backed securities and credit-linked notes

Fixed-Income Portfolio Risk Management
  • Risks Affecting Fixed-Income Portfolios
  • Interest-Rate Risks:
    • Volatility of Rates
    • Yield Curve Risk
    • Basis Risks
    • Embedded Option Risks
  • Measuring Rate Risk: Concepts and Measurement of Duration and Convexity
  • Exercise:  The GE Capital Bond
  • Duration of Strips, Bonds, Bills, Floating-rate Notes and Swaps
  • Immunization
  • McCauley and McPension
  • Case study: Gold's Gym. Delegates apply a barbell strategy to a fixed-income liability structure.
  • Option-pricing in bonds
  • Exercise: A Bond for CMHC
  • Duration and convexity in the context of mortgage-backed securities
  • Case studies: FannieMae MBS and REMIC. These deals are used to illustrate the power of duration analysis, and to consider convexity in fixed-income portfolios.
Fitch CDO Criteria

Synthetic ABS

Duration and Convexity

Notes on Fixed Income Portfolio Management

Spreadsheets and Calculators
bond math and more

Day 3 Structured Finance and Asset-Liability Management
  • Option-Linked Securities
  • When Should a Company Issue Hybrid Securities?
  • Callable Bonds, Options, Swaptions and Other Fixed-Income Derivatives Embedded in Structured Financing Techniques
  • Case study: Guernsey. Demonstration of hands-on use of option-bond pricing models and application by delegates
  • Case study: Bavaria Bank Bond. Insight into Design and Pricing of Fixed-Income Structured Notes
  • Applications to Mortgage Markets
Tools of Asset-Liability Management
  • Measuring the Gap: Portfolio Duration and Value at Risk
  • Closing the Gap: Portfolio Restructuring
  • Closing the Gap: Derivatives
  • Futures, Forwards and Swaps
  • Delta, Gamma and the Use of Options
  • Dynamic Hedging
  • Exercise: Home to Canadians. Managing the interest-rate risk of a mortgage portfolio funded with a CMHC bond.
Structured Notes

Spreadsheets and Calculators
Canadian mortgages
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