Understanding Credit Derivatives and Related Instruments, Second Edition is an intuitive, rigorous overview that links the practices of valuing and trading credit derivatives with academic theory. Rather than presenting highly technical explorations, the book offers summaries of major subjects and the principal perspectives associated with them. The book's centerpiece is pricing and valuation issues, especially valuation tools and their uses in credit models. Five new chapters cover practices that have become commonplace as a result of the 2008 financial crisis, including standardized premiums and upfront payments. Analyses of regulatory responses to the crisis for the credit derivatives market (Basel III, Dodd-Frank, etc.) include all the necessary statistical and mathematical background for readers to easily follow the pricing topics. Every reader familiar with mid-level mathematics who wants to understand the functioning of the derivatives markets (in both practical and academic contexts) can fully satisfy his or her interests with the comprehensive assessments in this book.

Nominal short term interest rates have been low in the United States, so low that some have wondered whether the federal funds rate is likely to hit its lower bound at 0 percent. Such a scenario, which some economists have called the liquidity trap, would imply that the Federal Reserve could no longer lower short-term interest rates to counter any deflationary tendencies in the economy. In this paper, I use an affine term structure model to infer what interest rates tell us about the probability, as assessed by financial market participants, of such an event taking place. I also examine whether U.S. short-term rates have been low enough to distort the shape of the yield curve.