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In this paper, we have developed a pricing model for credit spread options with the existence of the counterparty default risk. The default dependence is modeled in the interacting intensities framework, and the correlation between default and the interest rate is considered. Semi-analytic pricing formulas for European credit spread put options with counterparty risk are derived. The numerical analysis...
This paper establish a framework for analysis of mitigation and contagion effect of guaranteed debt. Contagion is modeled by interacting intensities. Analytical solutions are given through the approach of CGH survival measure. A term Conditional Odds Ratio is defined to set up a criterion for gauging the difference between mitigation effect and contagion risk in a pair of guaranteed debt. Numerical...
This paper establish a structural model framework to analyze the mitigation and contagion effect of guaranty portfolio, especially on reserve and capital allocation. Contagion is modeled as adjusting default barrier in Merton's structural model, while mitigation is modeled as delayed potential loss. Expected and unexpected losses are evaluated in this framework. Numerical analysis shows that guaranty...
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