A RISK NEUTRAL FRAMEWORK FOR THE PRICING OF course credit DERIVATIVES 1. INTRODUCTION Considerable research effort has gone into make come forth Derivatives since the early 1990?s. The roots of credit derivatives net be traced brook to the notion that the credit risk of a firm cigarette be captured by the credit rating ascribed to it. This premise is as well the cornerstone of loan pricing and credit risk forethought models the world over, including J.P. Morgan?s CreditMetricsTM. Empirical research enables the predictability of the font of negligence as well as the Loss in the emergence of Default (LIED).
This information is expressed in call of a ?transition matrix? - a matrix that traces out the probabilities the migration of a firm?s credit rating. Rating agencies such(prenominal) as Standard & Poor (S&P) provide transition matrices computed from periods of data most bonds - default record and post-default behaviour in the US markets. miss of adequate data precludes the computation of such matrices in t...
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