PDE Approach to Valuation and Hedging of Credit Derivatives
by Tomasz R. Bielecki of the Illinois Institute of Technology,
Abstract: This paper presents a PDE approach in a Markovian setting to hedge defaultable derivatives. The arbitrage price and the hedging strategy for an attainable contingent claim are described in terms of solutions of a pair of coupled PDEs. For some standard examples of defaultable claims, we provide explicit formulae for prices and hedging strategies.
Keywords: Credit derivatives, Hedging, Valuation, PDE approach.
Published in: Quantitative Finance, Vol. 5, No. 3, (June 2005), pp. 257-270.