Applying a factor copula to value basket credit linked notes with issuer default risk

Po-Cheng Wu

Finance Research Letters, 2010, vol. 7, issue 3, 178-183

Abstract: This paper explores a reasonable coupon rate for basket credit linked notes (BCLN) with issuer default risk. Based on the one factor Gaussian copula model, this paper proposes three methods of incorporating issuer default into BCLN pricing. Numerical results indicate that issuer default risk impacts BCLN coupon rate. Furthermore, coupon rate differs with changes in correlation structure among the three methods. One of the three methods is ultimately identified as the most suitable.

Keywords: Basket; credit; linked; notes; Issuer; default; risk; Default; correlation; Factor; copula; Monte; Carlo; simulation (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:7:y:2010:i:3:p:178-183

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