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Basic Insights in Pricing Basket Credit Derivatives

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  • Marcello Esposito

Abstract

type="main" xml:lang="en"> Basket credit derivatives are those financial contracts whose pay–out depends on the credit events (‘failure to pay’, ‘default’, etc.) characterizing a portfolio of bonds or loans over a determined time horizon. We have two main categories of basket credit derivatives. The first is characterized by a pay–out depending on the temporal ranking of the credit events: first–to–default, second–to–default, etc. The second is characterized by a pay–out depending on the percentiles of the portfolio's loss distribution induced by the credit events. The latter is often embedded in securitizations of portfolios of bonds or loans, i.e. CDO. This paper proposes some basic insights in the pricing of these particularly complex credit derivatives. Whenever possible, we will try to find an analytical approximation to the exact pricing formula, if a closed form solution is not available. (J.E.L.: G13).

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  • Marcello Esposito, 2002. "Basic Insights in Pricing Basket Credit Derivatives," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(2), pages 255-276, July.
    • Handle: RePEc:bla:ecnote:v:31:y:2002:i:2:p:255-276
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    File URL: http://hdl.handle.net/10.1111/1468-0300.00087
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    Cited by:

    1. Baglioni, Angelo & Cherubini, Umberto, 2013. "Marking-to-market government guarantees to financial systems – Theory and evidence for Europe," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 990-1007.
    2. Baglioni, Angelo & Cherubini, Umberto, 2013. "Within and between systemic country risk. Theory and evidence from the sovereign crisis in Europe," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1581-1597.

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