Credit Derivatives: Trading, Investing and Risk Management, Second Edition

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MathCad and MathSoft are registered trademarks of Mathsoft Engineering and Education, Inc., http://www.mathsoft.com.

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Poor quality collateral may be subject to a ‘haircut’ where the cash lent is less than the current market value - usually by 5% or so.

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In contrast debt issued by a country in a currency other than its own is typically identified as credit debt e.g. Brazilian debt in US dollars.

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Another reason we prefer a continuous time approach is that default can occur at any time - over a weekend, overnight - so a continuous time model of the default event process seems more natural.

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A Dirac delta function is such that δ(x) = 0 except at x = X, and δ(x)dx = 1. See, for example, Hoskins (1999).

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We understand that we are making a valuation ‘now’ - time t = 0. We could make the formulae more general (but unnecessarily so for our purposes at the moment) by making ‘now’ a variable too, which would allow us to write down a formula for forward claim amounts. This is necessary in an implementation of the above model for bond and CDS pricing, and is left as an exercise for the reader.

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There are often other complications such as ‘Brady Bonds’ where some of the cashflows (e.g. maturity amount) will be received in full (because they are guaranteed by the US government) while other cashflows (coupons) will not be received.

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See any standard text on probability and statistics: ...