Title: Pricing Credit Derivatives in a Markov Modulated Market.
Speaker: Srikanth Iyer (IISc)
Date: 10 September 2012
Venue: LH-II, Department of Mathematics, IISc
Credit risk refers to the potential losses that can arise due to the changes in the credit quality of financial instruments. There are two approaches to pricing credit derivatives, namely the structural and the reduced form or intensity based models. In the structural approach explicit assumptions are made about the dynamics of a firm’s assets, its capital structure, debt and share holders. A firm defaults when its asset value reaches a certain lower threshold, defined endogenously within the model. In the intensity based approach the firm’s asset values and its capital structure are not modelled at all. Instead the dynamics of default are exogenously given through a default rate or intensity.