Pierides, Yiannos A., "The Pricing of Credit Risk Derivatives", Journal of Economic Dynamics and Control, Vol. 21, No. 10, (August 1997), pp. 1579-1611.

Abstract: This paper considers the pricing of derivatives that protect holders of corporate bonds from a reduction in their value because of a deterioration in their credit quality. These derivatives are structured as either puts on the bond price or calls on the bond spread (above the risk free rate) in the context of models developed by Merton (1974) and Black and Cox (1976). The pricing properties of these options are derived using both analytical and numerical methods.

JEL Classification: C63, G13.

Keywords: Credit risk derivatives, Barrier options, Numerical methods.

Download paper (2,001K PDF) 33 pages

Related reading: Credit Risk Modeling with Affine Processes