Chartered Alternative Investment Analyst (CAIA) Structured Products and Digital Assets Syllabus

Structured Products and Digital Assets syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Structured Products and Digital Assets in Chartered Alternative Investment Analyst (CAIA), not a summary of it.

1. 1

   Credit Risk and Credit Derivatives

   3 topics

   • Fundamentals of credit risk
     • Probability of default and loss given default
     • Credit spreads and ratings
   • Credit default swaps
     • Single-name and index CDS
     • Settlement and credit events
   • Modeling credit risk
     • Structural (Merton) models
     • Reduced-form models
2. 2

   Securitization and Collateralized Structures

   3 topics

   • Securitization process
     • Special purpose vehicles and tranching
     • Credit enhancement and waterfalls
   • Mortgage- and asset-backed securities
     • RMBS, CMBS, and ABS
     • Prepayment and extension risk
   • Collateralized debt and loan obligations
     • CDO and CLO structures
     • Equity, mezzanine, and senior tranches
3. 3

   Structured Products and Linear/Nonlinear Payoffs

   3 topics

   • Building blocks of structured products
     • Zero-coupon bonds plus options
     • Principal protection mechanisms
   • Payoff engineering
     • Participation rates and caps
     • Barrier and digital features
   • Risks and pricing
     • Counterparty and liquidity risk
     • Embedded option valuation
4. 4

   Digital Assets and Blockchain

   4 topics

   • Blockchain and distributed ledger fundamentals
     • Consensus mechanisms and decentralization
     • Public versus private ledgers
   • Cryptocurrencies and tokens
     • Bitcoin and smart-contract platforms
     • Stablecoins, utility, and security tokens
   • Decentralized finance and tokenization
     • DeFi protocols and staking
     • Tokenization of real-world assets
   • Risks and valuation of digital assets
     • Custody, security, and regulatory risk
     • Valuation challenges and volatility

Structured Products and Digital Assets flashcards for Chartered Alternative Investment Analyst (CAIA)

20 of 50 cards from the Structured Products and Digital Assets deck — real questions with worked answers.

1. What are the three primary components of credit risk?

   Default risk (probability the borrower fails to pay), recovery/loss-given-default risk (the magnitude of loss if default occurs), and credit spread/downgrade risk (the risk that the credit's market spread widens or its rating is downgraded).

2. Define expected loss (EL) and give its standard formula.

   Expected loss is the anticipated average credit loss over a period: EL = PD × LGD × EAD, where PD = probability of default, LGD = loss given default (1 − recovery rate), and EAD = exposure at default.

3. What is the difference between probability of default (PD) and loss given default (LGD)?

   PD is the likelihood that a borrower fails to meet its obligations over a horizon; LGD is the percentage of exposure actually lost after recoveries if default occurs (LGD = 1 − recovery rate).

4. What is a credit default swap (CDS) and who are its two counterparties?

   A CDS is a bilateral OTC contract transferring credit risk of a reference entity. The protection buyer pays a periodic premium (the spread) and the protection seller compensates the buyer for credit losses if a defined credit event occurs.

5. List the standard ISDA credit events that can trigger a CDS payout.

   Bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default, and repudiation/moratorium (the last two mainly for sovereigns).

6. How is a CDS settled physically versus in cash?

   Physical settlement: the buyer delivers the defaulted reference obligation to the seller in exchange for par. Cash settlement: the seller pays the buyer par minus the recovery value (determined via auction), so the buyer keeps the bond.

7. State the approximate relationship between the CDS spread, PD, and recovery rate.

   CDS spread ≈ PD × (1 − recovery rate) = PD × LGD (per annum). Equivalently, PD ≈ spread / (1 − recovery rate).

8. What is the difference between a single-name CDS and a CDS index?

   A single-name CDS references one issuer's credit. A CDS index (e.g., CDX, iTraxx) references a basket of names, giving diversified credit exposure; buying index protection hedges broad credit risk.

9. What distinguishes structural credit risk models from reduced-form models?

   Structural (Merton-type) models treat default as occurring when firm asset value falls below debt, using equity as a call option on assets. Reduced-form (intensity) models treat default as an exogenous random event modeled by a hazard/default-intensity rate calibrated to market spreads.

10. In the Merton model, how is a firm's equity characterized?

    Equity is a call option on the firm's assets with strike equal to the face value of debt maturing at T. Debt holders are short a put on the assets; default occurs if asset value at T is below the debt's face value.

11. What is a hazard rate (default intensity) in a reduced-form model?

    The instantaneous conditional probability of default per unit time given survival so far. Survival probability over time t is e^(−λt) for constant intensity λ, and expected time to default is 1/λ.

12. What is the securitization process at a high level?

    A sponsor pools illiquid assets (loans, mortgages, receivables), sells them to a bankruptcy-remote special purpose vehicle (SPV), which issues tranched securities backed by the pool's cash flows to investors.

13. Why is a special purpose vehicle (SPV) used in securitization, and what does 'bankruptcy remote' mean?

    The SPV legally isolates the asset pool from the originator. 'Bankruptcy remote' means a bankruptcy of the originator does not give creditors claims on the SPV's assets, protecting investors' cash flows.

14. What does 'tranching' accomplish in a securitization?

    Tranching slices pool cash flows into securities of differing seniority and risk (senior, mezzanine, equity). Losses hit junior tranches first via the waterfall, creating securities with different ratings and yields from the same collateral.

15. List three common forms of credit enhancement in securitizations.

    Overcollateralization (collateral value exceeds issued notes), excess spread (collateral yield exceeds note coupons plus fees), and subordination/tranching plus reserve accounts or third-party guarantees/insurance.

16. What is the difference between an MBS and an ABS?

    A mortgage-backed security (MBS) is collateralized by mortgage loans (residential RMBS or commercial CMBS). An asset-backed security (ABS) is backed by non-mortgage receivables such as auto loans, credit cards, or student loans.

17. What is prepayment risk in mortgage-backed securities, and when does it intensify?

    Prepayment risk is the risk that borrowers repay principal early (e.g., refinancing). It intensifies when interest rates fall, returning cash to investors who must reinvest at lower rates—causing negative convexity and contraction risk.

18. Distinguish a pass-through MBS from a collateralized mortgage obligation (CMO).

    A pass-through passes pooled mortgage cash flows pro rata to all holders. A CMO retranches those cash flows into sequential or planned-amortization classes that redistribute prepayment and maturity risk among tranches.

19. What is the difference between agency and non-agency MBS?

    Agency MBS are issued/guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac, carrying little/no credit risk (mainly prepayment risk). Non-agency (private-label) MBS lack a GSE guarantee and carry meaningful credit risk.

20. What is a collateralized debt obligation (CDO)?

    A CDO is a structured security backed by a diversified pool of debt assets (bonds, loans, ABS) whose cash flows are tranched into notes of varying seniority and rating sold to investors.

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