CHAPTER 2Some Representative Case Studies
Consider the following plausible scenarios where the methods set out in the remainder of this book are found to address the types of challenge faced by risk management groups, looking to capture risk more effectively and accurately under regulatory and other pressures without increasing computational overheads unduly or engaging in costly new model development.
2.1 QUANTO CDS PRICING
A Korean client of a US bank wishes to sell protection on KRW‐denominated sovereign Korean debt and/or that of some systemically important Korean corporation. Providing a KRW‐based CDS rate is available, this can be used to price the protection (in KRW) according to the well-known formula
with 
the KRW short rate, 
the instantaneous KRW‐denominated credit spread and 
the expected recovery level on the debt post‐default. This can, if wished, be converted to a USD‐based price at today's spot exchange rate.
However, it may be that the KRW‐based spread is less liquid than the USD‐based alternative and the desk (or risk management department) prefer to use ...
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