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Valuation of a Credit Spread Put Option: The Stable Paretian model with Copulas

In: Handbook of Computational and Numerical Methods in Finance

Author

Listed:
  • Dylan D’Souza

    (HSBC Bank USA, Credit Risk Management)

  • Key van Amir-Atefi

    (HSBC Bank USA, Credit Risk Management)

  • Borjana Racheva-Jotova

    (Sofia University, Bulgaria, Faculty of Economics and Business)

Abstract

Financial institutions are making a concerted effort to measure and manage credit risk inherent in their large defaultable portfolios. This is partly in response to regulatory requirements to have adequate capital to meet credit event contingencies, but risk managers are also concerned about the sensitivity of the value of their portfolios to potential deteriorating credit quality of issuers. These changes in portfolio value can be quite significant for financial institutions such as commercial banks, insurance companies and investment banks, exposed to credit risk inherent in their large bond and loan portfolios. Credit derivatives are instruments used to manage financial losses due to credit risk, but unlike derivatives to manage market risk they are relatively less liquid and are more complicated to price because of the relative illiquidity of the underlying reference assets.

Suggested Citation

  • Dylan D’Souza & Key van Amir-Atefi & Borjana Racheva-Jotova, 2004. "Valuation of a Credit Spread Put Option: The Stable Paretian model with Copulas," Springer Books, in: Svetlozar T. Rachev (ed.), Handbook of Computational and Numerical Methods in Finance, chapter 2, pages 15-69, Springer.
    • Handle: RePEc:spr:sprchp:978-0-8176-8180-7_2
    DOI: 10.1007/978-0-8176-8180-7_2
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