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The Pricing of Some Credit Derivatives

Author: YanZuoCong
Tutor: LinJianZhong
School: Shanghai Jiaotong University
Course: Probability Theory and Mathematical Statistics
Keywords: credit spread option credit default swap Das-Sundaram model risk-neutral world risk-neutral drift coefficients default rate cumulative default rate recovery rate recursive
CLC: F830.9
Type: Master's thesis
Year: 2012
Downloads: 68
Quote: 0
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Abstract


Credit derivatives are contracts whose payoffs depend on the creditworthiness of one or more commercial entities. Contracts’underlying assets are usually corporate bonds. The most popular credit derivatives are credit default swap and credit spread options. There is a genuine interest of financial institutions on credit derivatives but their expansions are strongly limited. This is because there are only a few models which can price the credit derivatives, and each model has its own advantage and disadvantage. So the main purpose of this article is to study how to price credit derivatives better.The article is organized as follows. At the beginning, we present and discuss the main characteristics of credit spread option. Then we introduce three kinds of models for credit derivatives pricing. They are structural models, reduced form models and spread models. The article focuses on Das-Sundaram model which belongs to reduced form models. In Das-Sundaram model, we bring in stochastic processes for forward risk-free rate and forward spread. More, we discuss how to get drift coefficients of the stochastic processes and a recursive representation of bond prices. On the basis of historical data, we use stepwise regression and a least-squares regression to get some parameters such as correlation coefficient of random variables X1、X2, bonds’ default rate, cumulative default rate and recovery rate. At last, we stimulate some data and use Das-Sundaram model to price for European/American credit spread option, European path-dependent option and credit default swap.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Financial market
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