Valuation and Hedging of Credit Derivatives

Pde Approach to the Valuation and Hedging of Basket Credit Derivatives

Valuation of Basket Credit Derivatives in the Credit Migrations Environment

The goal of this work is to present a methodology aimed at valuation and hedging of basket credit derivatives, as well as of portfolios of credits/loans, in the context of several possible credit ratings of underlying credit instruments. The methodology is based on a specific Markovian model of a financial market. The research of T.R. Bielecki was supported by NSF Grant 0202851 and Moody’s Corp...

Up and down Credit Risk

This paper discusses the main modeling approaches that have been developed so far for handling portfolio credit derivatives. In particular the so called top, top down and bottom up approaches are considered. We first provide an overview of these approaches. We give some mathematical insights to the fact that information, namely, the choice of a relevant model filtration, is the major modeling i...

Dynamic Hedging of Counterparty Exposure∗

We study mathematical aspects of dynamic hedging of Credit Valuation Adjustment (CVA) in a portfolio of OTC financial derivatives. Since the sub-prime crisis, counterparty risk and wrong-way risk are a crucial issue in connection with valuation and risk management of credit derivatives. In this work we first derive a general, model free equation for the dynamics of the CVA of a portfolio of OTC...

Hedging of Defaultable Claims

The goal of these lectures is to present a survey of recent developments in the practically important and challenging area of hedging credit risk. In a companion work, Bielecki et al. (2004a), we presented techniques and results related to the valuation of defaultable claims. It should be emphasized that in most existing papers on credit risk, the risk-neutral valuation of defaultable claims is...