In our project we have used parametric simulation and filtered historical simulation by GARCH processes to model the future position on a portfolio of some actively trading S&P bonds and related credit default swaps. The portfolio is marked to market daily based on the daily prices and CDS spreads over a seven year period. The Credit default swaps are priced daily based on the shifts in the def...

This article describes a continuous-time Markov approach to the riskneutral pricing of a credit default swap with counterparty risk. The key parameters in the approach are the transition rates, which naturally incorporate the ideas of contagion. Correlation (which is time-dependent) is a derived quantity, which results from contagion. An expansion in powers of a small parameter (a risk-neutral ...

Multi-asset credit derivatives trade in huge volumes, yet no models exist that are capable of properly accounting for the spread behaviour of dependent companies. In this thesis we consider new ways of incorporating a richer and more realistic dependence structure into multi-firm models. We focus on the structural framework in which firm value is modelled as a geometric Brownian motion, with de...

We analyze the connections between the credit spreads that the same credit risk commands in different currencies. We show that the empirically observed differences in these credit spreads are mostly driven by the dependency between the default risk of the obligor and the exchange rate. In our model there are two different channels to capture this dependence: First, the diffusions driving FX and...

This study explores a credit derivative pricing model with counterparty risk and the contagion effect. To compare with the standard credit derivative pricing model, we analyze the counterparty risk and the contagion effect to a kthto-default Basket Credit Linked Note (BCLN) valuation by Monte Carlo simulation. Counterparty risk and the contagion effect show significant influence for kth-to-defa...

In its October 2013’s consultative paper for a revised market risk framework (FRTB), the Basel Committee suggests that non-securitization credit positions in the trading book be subject to a separate Incremental Default Risk (IDR) charge, in an attempt to overcome practical challenges raised by the joint modeling of the discrete (default risk) and continuous (spread risk) components of credit r...

Folk theories—untutored people’s (often implicit) theories about various features of the world—have been fashionable objects of inquiry in psychology for almost two decades now (e.g., Hirschfeld and Gelman 1994), and more recently they have been of interest in experimental philosophy (Nichols 2004). Folk theories of psychology, physics, biology, and ethics have all come under investigation. Fol...

In April 2004, JP Morgan introduced the notion of base correlations, a novel approach to quoting correlations for synthetic CDO tranches, which facilitates a simple relative valuation of off-market tranches. Using a simple intensity based credit risk model we generate ‘true’ tranche spreads and examine the behavior of the base correlations and the merits of the relative valuation approach. We r...

We derive a consistent way to price multiname credit derivatives. The methodology proposed is based on copulas function to model the joint distribution of default times. The copula correlation coefficient are provided from the structural model.