A Direct Approach to Arbitrage-Free Pricing of Credit Derivatives
Sanjiv Das () and
Rangarajan K. Sundaram
No 6635, NBER Working Papers from National Bureau of Economic Research, Inc
This paper develops a model for the pricing of credit derivatives using observables. The model (i) is arbitrage-free, (ii) accommodates path-dependence, and (iii) handles a range of securities, even with American features. The computer implementation uses a recursive scheme that is convenient and seamlessly processes forward induction and backward recursion, needed to compute more complicated derivative securities.
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