Credit risk: Modelling, valuation and hedging (Q5940704)

The main purpose of the outstanding monograph is to present a comprehensive survey of the existing developments in the area of credit risk research, as well as to put forth the most recent advancements in this field. An important feature of this book is its attempt to bridge the gap between the mathematical theory of credit risk and the financial practice. The book is organized in three main parts, with 15 chapters. Part I (Structural Approach) contains Chapters 1-3, devoted to the classic value-of-the firm approach to the valuation and hedging of corporate debt. This approach is also frequently called as the structural approach. Chapter 1 provides an introduction to the basic concepts that underlie the area of credit risk valuation and management. The terminology and notation related to defaultable claims is introduced an overview of the market instruments associated with credit risk is given, and a description of the three types of credit-risk sensitive devices is provided: corporate bond, vulnerable claims, and credit derivatives. Chapters 2 and 3 comprise the so-called structural approach, referred also as the option-theoretic approach, based on the first-passage-time models. Part II (Hazard Processes) includes Chapters 4-7, and provides a systematic exposition of the technical tools needed in the reduced-form approach to credit risk modeling. Much attention is paid to characterization of random times in terms of hazard functions, hazard processes, martingale hazard processes, and to evaluating relevant (conditional) probabilities and (conditional) expectations in terms of these functions and processes. Pertinent versions of Girsanov's theorem and martingale representation theorem are enclosed, and a comprehensive study of the problems related to the modeling of several random times within the framework of intensity-based approach is presented. Part III (Reduced-Form Modeling), with Chapters 8-15, is dedicated to illustrate the developed theory trough examples of real life credit derivatives and market methods related to risk management. Chapter 8 discusses fundamentals issues regarding the intensity-based valuation and hedging of defaultable claims in case of single reference credit. The key concept is the survival probability of a reference instrument or entity, more specifically, the hazard rate that represents the intensity of default. Chapters 9 and 10 deal with the case of several reference credit entities, analyzing basket derivatives and default correlations. Chapter 11 presents the relevant aspects and the role of Markov chain theory in the modeling of credit migrations, while Chapter 12 examines credit risk models with multiple ratings, using also a methodology based on Markov models. In Chapter 13, the authors expose the most recent developments that combine the HJM (Heath-Jarrow-Morton) methodology for modeling of instantaneous forward rates with a conditionally Markov model of credit migrations. Probabilistic interpretation of the market price of interest rate risk and the market price of the credit risk is highlighted. Chapters 14 and 15 introduce various typical examples of defaultable forward constructs and the associated types of defaultable market rates. BGM (Brace-Gatarek-Musiela) model of forward LIBOR rates, Jamshidian's model of forward swap rates, and ideas related to the modeling of defaultable LIBOR and swap rates are also included. The contents of this book provides an indispensable guide to graduate students, researchers, and also to advanced practitioners in the fields with an explosive development now-a-days, such as finance theory, mathematical finance, and financial engineering.