Hedging Calls in the Black Model with Default
نویسنده
چکیده
File reference: blackdef.tex We develop the theory of hedging a European call option in the Black model augmented by the possibility of default in the underlying asset. We model default as a drop to zero and we assume that the credit default swap rate is constant. In this setting, we show that the call's payoff can be perfect replicated by dynamic trading in the underlying futures and in credit default swaps. I thank the members of Bloomberg's QFR and QFD groups for their comments. I am solely responsible for any errors.
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