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A Note on Credit Insurance

Published online by Cambridge University Press:  17 April 2015

Johannes Leitner
Johannes Leitner*
Affiliation:
Research Unit for Financial and Actuarial Mathematics, Institute for Mathematical Methods in Economics, Vienna University of Technology, Wiedner Hauptstraße 8-10/105, A-1040 Vienna, Austria. E-mail: jleitner@fam.tuwien.ac.at
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Abstract

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In a simple stationary setting with constant interest rate, we derive pricing formulas for defaultable bonds with stochastic recovery rate using a replication argument. Replication is done by using an insurance contract (i.e. a kind of credit default swap), the price of which is determined by a dynamic premium calculation principle. We consider two cases, a linear one, where pricing amounts to solving an inhomogeneous linear ODE, and a super-linear case where a Riccati ODE has to be solved.

Keywords

Credit insurancecredit default swapsrandom measuresterm structure for defaultable bondsdynamic premium calculation principle

Information

Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 36 , Issue 2 , November 2006 , pp. 347 - 360
Copyright
Copyright © ASTIN Bulletin 2006

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