Univariate pricing is a key component to the pricing of structured credit vehicles. To date, credit is still very much an incomplete market. In addition, it is usually difficult to use a simple diffusion setup to model its dynamic, as default risk is usually perceived as an unexpected event, i.e., a jump. An incomplete market and the presence of jumps make the credit space a difficult market, where it is not always easy to derive prices from the cost of related replicating (hedging) strategies/portfolios.
Due to these characteristics, market participants have been trying hard to make the most of two alternatives:
Continue Reading »
Posted in Finance, Loan
The credit risk associated with a default-able debt instrument can be decomposed into two components: default risk and recovery risk. The former captures the uncertainty related to a possible default while the latter reflects the uncertainty related to recovery in the case of default.
Default risk can be analyzed from various perspectives. One of these perspectives is provided by the rating approach, in which default risk is quantified by means of a credit rating. These credit ratings are assigned by rating agencies, such as Standard & Poor’s (S&P), Moody’s, and Fitch, and the ratings assigned by these agencies are widely used as default risk indicators by market participants.
Continue Reading »
Posted in Finance, Strategy