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This paper presents a new factor copula model for pricing CDO tranches, where the involved distributions are mixtures of Gaussian distribution and VG distribution. Besides, random recovery rate is introduced into the mixed copula framework to effectively model "correlation smile" in CDO pricing. Numerical analysis shows that the new model may better simulate the loss distribution of the...
A basket default swaps is a credit derivative whose underlying assets are usually bond. It has been proved that the realized recovery value of a defaultable bond can cover a large spectrum of values both across within levels of seniority and security and correlates negatively with default probability. However, recovery rate is mostly assumed as constant or exogenous, which can not capture the market...
Many underlying assets of option contracts exhibit both jump-diffusion process and stochastic volatility. This paper investigates the valuation of options when the underlying asset follows a jump-diffusion process with stochastic volatility ,which correlated asset return process. A closed form solution is derived for European options through the use of characteristic function and the Fourier transform...
This article presents a trinomial tree model for pricing American credit spread options (CSOs) on a defaultable zero-coupon bond with equity and market risk. Interest rates are assumed to follow a mean-reverting square root process. The reduced-form approach is generalized to include a constant elasticity of variance (CEV) process for equity prices prior to default, which is capable of reproducing...
In this paper, we get the pricing framework of the convertible bond (CB) with call clause in exponential variance Gamma (EVG) model rather than the classical Black-Scholes (BS) model. From numerical calculation, we conclude that the new approach does lead to a different pricing method, but the difference of prices is insignificantly and the optimal stopping strategies are exactly the same.
This article presents a trinomial tree model for pricing zero-coupon convertible bonds (CBs) subject to equity, market and default risk. Interest rates are assumed to follow a mean-reverting square root process. Equity prices prior to default are modeled as a constant elasticity of variance (CEV) process, which is capable of reproducing the volatility smile observed in the empirical data. Based on...
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