Pricing contingent claims with credit risk: asymptotic expansion approach (Q2488488)

The author studies pricing problems of credit derivatives using a reduced modelling approach. It is demonstrated that it is possible to treat the pricing problems of credit derivatives under a widely adapted class of models by an asymptotic expansion approach. Two advantages of this approach are established. First, it is possible to obtain an analytic approximation formula for the price of the credit derivatives. This feature enables rapid computation of prices of the contingent claims. Second, the figures derived by this method are very accurate. Although it is possible to justify this method using the Malliavin calculus which is known as the stochastic method of variations, only formal asymptotic expansion methods are examined in the paper.