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Credit Derivatives II

In this chapter we consider some further approaches to credit derivatives pricing. Numerous techniques for credit default swaps and default options are considered. When pricing securities that are subject to credit risk, we can proceed in one of two ways. We can consider fundamental analysis, such as credit ratings, balance sheet (for firms), fiscal health, political situations, and market sentiment. From these factors we can determine, often heuristically, the proper premium on a credit risky security from a risk/reward standpoint. Alternatively, we can take information contained in the market prices for debt, equity and some liquid derivatives to derive a “no-arbitrage” price for the credit risk. From this framework we ...

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