|
Post by Sapphire Capital on Jul 12, 2008 0:10:41 GMT 4
Credit derivatives are subject to at least two sources of risk: default time and the recovery payment. This paper examines the impact of ling the recovery payment on hedging strategies in a reduced-form l as well as a Merton-type l. It shows that quadratic hedging approaches do only depend on the "expected" recovery payment at default and not the whole shape of the recovery payment distribution. This justifies assuming a "certain" recovery payment conditional on the default time. Hence, this result allows a simplified ling of credit risk. see: papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1102577_code152554.pdf?abstractid=1102577&mirid=1
|
|