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Credit risk in derivative securities: A simplified approach
Author(s) -
Baule Rainer
Publication year - 2021
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22189
Subject(s) - computer science , derivative (finance) , credit derivative , credit risk , calibration , simple (philosophy) , actuarial science , econometrics , economics , finance , mathematics , statistics , philosophy , epistemology
The pricing of options and other derivatives which are subject to the default risk of the writer usually requires the calibration of a sophisticated model and substantial effort in determining the input parameters. We propose a very simple method to incorporate correlated credit risk into the pricing of vulnerable derivatives. The approach is based upon some approximations of more complex models and requires a minimum of input parameters. It is therefore easily applicable and maintains the accuracy of sophisticated models to a large extent, as shown in numerical studies for call options, put options, and discount certificates.

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