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Pricing and Hedging Credit Derivatives with Copulas

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  • Umberto Cherubini
  • Elisa Luciano

Abstract

In this paper, we apply a copula function pricing technique to the evaluation of credit derivatives, namely a vulnerable default put option and a credit switch. Also in this case, copulas enable one to separate the specification of marginal default probabilities from their dependence structure. Their use is based here on no-arbitrage arguments, which provide pricing bounds and easy-to-implement super-replication strategies. Copyright Banca Monte dei Paschi di Siena SpA, 2003

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Article provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.

Volume (Year): 32 (2003)
Issue (Month): 2 (07)
Pages: 219-242

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Handle: RePEc:bla:ecnote:v:32:y:2003:i:2:p:219-242

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Cited by:
  1. Viviana Fernandez, 2006. "Copula-based measures of dependence structure in assets returns," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 228, Centro de Economía Aplicada, Universidad de Chile.
  2. Ahmedov, Zafarbek & Woodard, Joshua D., 2012. "Do RIN Mandates and Blender's Tax Credit Affect Blenders' Hedging Strategies?," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 124980, Agricultural and Applied Economics Association.

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