Pricing and Hedging of Credit Risk: Replication and Mean-Variance Approaches
October 18, 2003
Abstract: The paper presents some methods and results related to the valuation and hedging of defaultable claims (credit-risk sensitive derivative instruments). Both the exact replication of attainable defaultable claims and the mean-variance hedging of non-attainable defaultable claims are examined. For the sake of simplicity, the general methods are then applied to simple cases of defaultable equity derivatives, rather than to the more complicated examples of real-life credit derivatives.
Keywords: Mathematical finance, credit risk.
This paper is republished as Ch.4 in...