credit spread option
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2015 ◽  
Vol 28 (6) ◽  
pp. 1363-1373 ◽  
Author(s):  
Rongxi Zhou ◽  
Sinan Du ◽  
Mei Yu ◽  
Fengmei Yang








2006 ◽  
Vol 14 (1) ◽  
pp. 27-39 ◽  
Author(s):  
Nabil Tahani


2003 ◽  
Vol 06 (05) ◽  
pp. 491-505 ◽  
Author(s):  
Joao B. C. Garcia ◽  
Helmut van Ginderen ◽  
Reinaldo C. Garcia

In this article we describe what a credit spread option (CSO) is and show a tree algorithm to price it. The tree algorithm we have opted for is a two factor model composed by a Hull and White (HW) one factor for the interest rate process and a Black-Karazinsky (BK) one factor for the default intensity. As opposed to the tree model of Schonbucher 1999 the intensity process cannot become negative. Having as input the risk free yield curve and market implied default probability curve the model by construction will price correctly the associated defaultable bond. We then use Market data to calibrate the model to price an at the money (ATM) CSO call and then test it to price an out of the money (OTM) Bermudan CSO call on a CDS. Furthermore the discussions in this paper show in practice the difficulties and challenges faced by financial institutions in marking to market those instruments.



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