DEFAULTABLE OPTIONS IN A MARKOVIAN INTENSITY MODEL OF CREDIT RISK

Tomasz R. Bielecki, Stéphane Crépey, Monique Jeanblanc and Marek Rutkowski

Mathematical Finance, 2008, vol. 18, issue 4, 493-518

Abstract: This paper is a follow‐up to “Valuation and Hedging of Defaultable Game Options in a Hazard Process Model” by the same authors. In the present paper we give user friendly assumptions ensuring that the general conditions in the previous paper are satisfied. We also give a systematic procedure to construct suitable intensity models of credit risk, and, in the Markovian case, we provide a variational inequality approach to the pre‐default pricing problem. We finally illustrate our results on a study of defaultable convertible bonds.

Date: 2008
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