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Pricing Derivatives on Financial Securities Subject to Credit Risk
Abstract
This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a “spot exchange rate.” Arbitrage‐free valuation techniques are then employed. This methodology can be applied to corporate debt and over the counter derivatives, such as swaps and caps.
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Citations
Cited by
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Barberis, N., Huang, M., & Santos, T. (2001) · The Quarterly Journal of Economics · doi:10.1162/003355301556310 · Cited by 1,895
On cox processes and credit risky securities
Lando, D. (1998) · Review of Derivatives Research · doi:10.1007/bf01531332 · Cited by 1,208
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Campbell, J. Y., & Taksler, G. B. (2003) · The Journal of Finance · doi:10.1046/j.1540-6261.2003.00607.x · Cited by 1,206
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Modelling customer loyalty in financial services: A hybrid of formative and reflective constructs
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Metadata
- Authors
- JARROW, R. A., & TURNBULL, S. M.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 1995-03
- Volume
- 50
- Issue
- 1
- Pages
- 53-85
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2082317778
- Cited by
- 1,933
- References
- 0
- FWCI
- 30.91
- Type
- journal article
- Language
- en
- Open access
- closed
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- JARROW, R. A., & TURNBULL, S. M. (1995). Pricing Derivatives on Financial Securities Subject to Credit Risk. The Journal of Finance. https://doi.org/10.1111/j.1540-6261.1995.tb05167.x
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Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
