This chapter explains how the main types of credit derivatives work and how they are valued. Central to the valuation of credit derivatives is an estimation of the probability that reference entities will default. The chapter discusses both the risk-neutral probabilities of default implied from...

University of Minnesota Ph.D. dissertation. June 2011. Major: Business Administration. Advisor: Robert S. Goldstein. 1 computer file (PDF); ix, 117 pages, appendices p. 110-117.

We propose a reduced form model for default that allows us to derive closed-form solutions to all the key ingredients in credit risk modeling: risk-free bond prices, defaultable bond prices (with and without stochastic recovery) and probabilities of survival. We show that all these quantities...