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Market Completeness in the Presence of Default Risk

by Nordine Bennani of Société Générale, and
Monique Jeanblanc of the Université d'Evry

April 2004

Abstract: In this paper, we study the case of a credit market and try to achieve the completeness, for a given class of assets, using replicating strategy based on a set of defaultable basic assets and cash account. In practice, the assets used for hedging strategies are the defaultable zero-coupon bonds of different maturities. As the payment at hit is admissible in the credit market, this class of asset can be considered as equivalent to the CDS, which is the practical hedging instrument.

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