PDE approach to valuation and hedging of credit derivatives
Abstract:This paper presents a PDE approach in a Markovian setting to hedge defaultable derivatives. The arbitrage price and the hedging strategy for an attainable contingent claim are described in terms of solutions of a pair of coupled PDEs. For some standard examples of defaultable claims, we provide explicit formulae for prices and hedging strategies.
Document Type: Research Article
Affiliations: 1: Department of Applied Mathematics, Illinois Institute of Technology, Chicago, IL 60616, USA 2: Département de Mathématiques, Université d'Évry Val d'Essonne, 91025 Évry Cedex, France 3: Faculty of Mathematics and Information Science, Warsaw University of Technology, 00-661 Warszawa, Poland
Publication date: June 1, 2005