PDE Approach to the Valuation and Hedging of Basket Credit Derivatives

by Marek Rutkowski of the University of New South Wales, and
Khan Yousiph of the University of New South Wales

July 10, 2006

Abstract: The goal of this work is to examine the PDE approach to the valuation and hedging of defaultable claims in a Markovian model of credit risk. Our approach is based on the paper by Bielecki, M. Jeanblanc, and M. Rutkowski entitled "PDE Approach to Valuation and Hedging of Credit Derivatives". We extend their results by considering a general credit risk model, in which the number of traded assets, the dimension of the driving Brownian motion, as well as the number of default times are arbitrary.

Keywords: basket credit derivatives, PDE approach.

Published in: International Journal of Theoretical and Applied Finance, Vol. 10, No. 8, (December 2007), pp. 1261-1285.

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