Credit-IR-FX Hybrid Derivatives without Stochastic Hazard Rates

We propose a model which allows to price and hedge credit/IR/FX hybrid products whose payoffs do not depend on the change in credit quality of the underlying entity prior to default. It is based on the multi-currency Hull-White model, with Gaussian short rates and log-normal spot FX rates. The correlation between credit and IR/FX rates is realized by default-contingent jumps. The interest rate jumps are absolute in the case of interest rates, and proportional in the case of FX rates, with deterministic magnitudes. The model can be applied to price such products as quanto CDS, extinguisher/credit-contingent IRS and contingent CDS. It accounts for the quanto CDS spread and the risky Libor forwards adjustment. The additional advantages of the model are its simplicity and ease of calibration. In our paper, we derive the mathematical description of the model, discuss the pricing and analyze its application to several products