Credit Risk

Robert Jarrow ()

Chapter 6 in The Economic Foundations of Risk Management:Theory, Practice, and Applications, 2017, pp 53-58 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter studies the reduced form models for pricing and hedging credit risk created by Jarrow and Turnbull [44, 45]. Credit risk exists whenever two counter parties engage in borrowing and lending. Borrowing can be in cash, which is the standard case, or it can be through the ‘shorting’ of securities. Shorting a security is selling a security one does not own. To do this, the security must first be borrowed from an intermediate counterparty, with an obligation to return the borrowed security at a later date. The borrowing part of this shorting transaction involves credit risk. Since the majority of transactions in financial and commodity markets involve some sort of borrowing, understanding the economics of credit risk is fundamental to the broader understanding of economics itself.

Keywords: Risk Management; Derivatives; Value-at-Risk; Funding Risk; Financial Engineering (search for similar items in EconPapers)
JEL-codes: G31 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (15)

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