Random Exchange Rate Under Several Types Of The Credit Derivatives Pricing Model And Its Application

Recently, with the outbreak of financial crisis, application of creditderivatives has been increasing. The essence of credit derivatives is toredistribute or transfer credit risks embedded in structured products.Hence, research on credit derivatives is fundamental to stabilize andenhance the entire financial system.Credit risks consist of credit default risk, credit downgrade risk andcredit spread risk. Credit default risk refers to borrowers unable orunwilling to pay the scheduled amount of payment on financial claims.This paper involves credit derivatives pricing model based on creditdefault risk.The pricing model in this paper is established as follows. Issueroperates businesses in China while raising capital in the US. With creditderivatives on the reference launched in the US market, investors tendto buy these products to transfer credit risks. The selling party of thederivatives is guaranteed by the government, thus default free in thiscase. Investors face the issuers credit default risk and foreign exchangerate risk.The first chapter is organized by the main introductions of credit risksand the establishment of the pricing model used in this paper. Thedevelopments of study and research on credit risks are also included.Various fundamental knowledge and theories of credit risks arepresented in chapter two.In chapter three, the pricing of credit default swap (CDS) is gainedunder the assumption of stochastic foreign exchange rate and theapplication of Backward-Kolmogrov equation. Through PDE, the issuersdefault density function is obtained and the financial analysis is given.In chapter four, credit linked note (CLN) is considered in this model.Under the structural method and the stochastic foreign exchange rate assumption, the market price of CLN is reached with the financialanalysis of different variables.In chapter five, a calibrated CLN product is valued in this model.The product is a combination of a putable bond and a CDS. Throughstructural method and PDE, the market price of the product is gained.Finally, in chapter six, a summary of this paper is made and furtherresearch outlines are provided.