Credit risk valuation. Methods, models, and applications. (Q5940714)

This is a revised and extended version of the author's monograph [Pricing derivative credit risk, Lecture Notes Econ. Math. Syst. 470 (Berlin, Springer) (1999; Zbl 0971.91026)]. He states in the Introduction that the book is addressed to ``\dots{} academics and practitioners interesting in modelling credit risk and, particularly, derivative credit risk'' and that it may serve ``\dots{} as a supplementary text for an advanced course in credit risk and financial derivatives''. In Ch. 2 one finds general contingent claim valuation theory (with the Black-Scholes formulae and the Heath-Jarrow-Morton methodology for interest-rate modelling). Then comes a review Ch. 3 on credit risk models. Ch. 4 provides a simple such model based on firm value. Closed-form solutions for option prices are derived both for deterministic and Gaussian interest rates, in both cases with deterministic and stochastic liabilities (with rigorous proofs). The model presented captures correlation and interest-rate risk effects on the prices of credit-risky securities. In Ch. 5 a pricing model is proposed for contingent claims with counterparty risk, combining firm value models and intensity models. It is studied under various assumptions with respect to the bankruptcy process and interest rates. In the last chapter the following credit derivative instruments are described: credit risk swaps, default put options, total return swap and credit spread options. A compound approach for pricing spread options and forward contracts is proposed, using the firm value to model the credit risk of the reference asset. Each chapter contains a summary of the material presented. In Ch. 4, 5 and 6 one finds several numerical examples. Standard results from martingale theory and stochastic calculus needed are gathered in the appendix. The reference list consists of about 200 items.