Das, Sanjiv Ranjan, "Credit Risk Derivatives", Journal of Derivatives, Vol. 2, No. 3, (Spring 1995), pp. 7-23.
Abstract: To most people, "risk" for a bond or a loan means default risk. Yet the vast majority of derivative instruments available today are for hedging market risk rather than default. This article describes a new class of derivatives specifically designed to manager credit risk, and presents a methodology for valuing and hedging them. Credit risk options (CROs) make a payoff to the holder if the credit-worthiness of a bond issuer falls below a "strike" level. As Das shows, the value of a CRO is a function of both the interest rate process and the evolution of total firm value during the option's lifetime.