Credit Derivative Strategies: New Thinking on Managing Risk and Return

CHAPTER 8

Pricing Models

ROHAN DOUGLAS AND PETER RIVERA

Introduction

Valuation of credit derivatives has been one of the most exciting and challenging areas of financial engineering over the past few years. Pricing and hedging of these products pose unique challenges, and both the academic and professional communities have made considerable efforts to steadily improve the tools available. This effort has resulted in a constant and continuing stream of new approaches and ideas, particularly for some of the more recent basket products.

The wide variety of valuation approaches available reflects the diverse use of credit derivatives. Each of these approaches has different strengths and weaknesses, and the right choice depends on the intended ...