The Pricing And Application Research On Credit-Linked Note

Credit risk is being considered to be the most serious risk of banks. Since it has something to do with their survival, credit risk attracts more and more attention of the bank institutions and the supervision departments. With the competition to loan between banks and non-bank financial institutions become more and more furious, the credit risk of bank loans is increasing greatly. Though the banks have paid great attention to it, and adopted a series of measures, but all of these measures are unsystematic, thus the cost of credit risk management greatly increase while the effects are not ideal. At the end of 20th century , there developed a kind of new financial derivatives—credit derivatives, it deviate credit risk from market risk and makes it easier to trade and manage, change the fashion of credit risk management radically.Among all the kinds of credit derivatives, Credit-Linked Note is one of the kinds that developed rapidly. Compared with other credit derivatives, the difference is that Credit-Linked Note is a kind of credit derivatives which refers to inflow of the capital, namely the protection buyer takes in the principal of the note in advance, get guarantee for the reference asset, thus need not to undertake the default risk of investor. In this way, issuer can avoid the counterparty risk. It is one of the reasons that this essay hold out the following idea: we should develop CLN to manage credit risk in our country. Besides, it provide a way of financing for banks by issuing CLN, it also can release regulatory capital; as for investor , they can acquire ideal yield which is higher than common security by undertaking corresponding risk after avoiding kinds of restrictions.Precise and proper pricing is the first issue to solve in order that CLN can play an important role in credit risk management in domestic banks. Since CLN is a kind of securities, then if we know the interest rate R that the note pays, we can ascertain the price of the note at any time. By far, there are three models on pricing credit risk: structural model, intensity model and hybrid model. On the basis of analyzing existing models, supposing that there don't exist relativity of default between reference asset and issuer. At first, we talk about the case that the issuer is bank, we know that the bank can also default because of the differences in management. Then we classify fours cases: namely, neither reference asset nor issuer default, reference asset default while issuer not, issuer default while reference not , both reference asset and issuer default. We can derive a depression of R about the default time under risk-neutral measure after analyzing cash flow of each dealer, then acquire R by simulating default time using intensity model. Then, we also analyze the case that the issuer is SPV, which is usually considered to impossible to default, there are only two cases,namely default and not default of the reference asset. Thus, we solve the first problem of the application of CLN. And then, we still analyze other conditions of its application: from the point of macroscopical side, there is a huge market of loans which provide the basis for CLN; from the point of microcosmic main dealers whose abroad needs provide CLN the development room; and finally interrelated operation practices have good to its application. At the end of the paper , we make a prospect of CLN in our country, and bring forward processes of development.