Search results for "Zero-coupon bond"
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Robust Recovery Risk Hedging: Only the First Moment Matters
2009
Credit derivatives are subject to at least two sources of risk: the default time and the recovery payment. This paper examines the impact of modeling the recovery payment on hedging strategies in a reduced-form model as well as a structural model. We show that all hedging approaches based on a quadratic criterion do only depend on the expected recovery payment at default and not the whole shape of the recovery payment distribution if the underlying hedging instrument (say, a defaultable zero coupon bond) jumps to or reaches a pre-specified value when the credit event occurs. This justifies assuming a \emph{certain} recovery rate conditional on default time and interest rate level. Hence, th…
Pricing of Asian exchange rate options under stochastic interest rates as a sum of options
2002
The aim of the paper is to develop pricing formulas for long term European type Asian options written on the exchange rate in a two currency economy. The exchange rate as well as the foreign and domestic zero coupon bond prices are assumed to follow geometric Brownian motions. The emphasis is devoted to the discretely sampled Asian option. It is shown how the value of this option can be approximated as the sum of Black-Scholes options. The formula is obtained under the extension of results developed by Rogers and Shi (1995) and Jamshidian (1991). In addition bounds for the pricing error are determined. Comparing with Monte Carlo simulation the pricing is found to be very precise.