Hybrid Derivatives Pricing Under the Potential Approach

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Hybrid Derivatives Pricing Under the Potential Approach

by Giuseppe Di Graziano of the University of Cambridge, and
L.C.G. Rogers of the University of Cambridge

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.

JEL Classification: G12, G33.

Keywords: hybrid, default, potential approach, pricing.

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