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Listed:
  • Antonio Mele

    (University of Lugano)

  • Yoshiki Obayashi

    (Applied Academics LLC)

Abstract

This chapter builds on the general framework of Chap. 2 , and develops indexes of expected volatility in the credit market. An inherent risk in this market that is absent from all others studied in this book is default risk, and this chapter describes how to account for it when pricing credit variance while also handling the exotic nature of options on credit default swap indexes. For example, options to enter into an on-the-run credit default swap index are typically struck at spreads differing from the initial contractual coupons, which calls for strike adjustments that lead to non-standard payoffs. This chapter proposes modifications to the volatility index calculations based on vanilla payoffs that adjust for the non-standard nature of options traded in practice.

Suggested Citation

Handle: RePEc:spr:sprfcp:978-3-319-26523-0_5
DOI: 10.1007/978-3-319-26523-0_5
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