Hybrid Derivatives Pricing Under the Potential Approach
by Giuseppe Di Graziano of the University of Cambridge, and
May 4, 2006
Abstract: We present a general framework to price contingent claims whose pay-offs involve equity, credit and interest rate components. The common cross-market dynamics are modeled via a Markov-chain ξ. The model is dynamically consistent and allows for a high degree of flexibility. Prices of various vanilla and more complex derivative products can be derived analytically or resorting to integral transform techniques.
Keywords: hybrid, default, potential approach, pricing.