HJM Model And Its Application In Credit Risk

Risk Management has been paid more and more attention by regulators and var-ious financial institutions recently since the financial crisis in 2008.Credit risk,which has been studied for a long time,is one of the most important topics.There are a va-riety of models which concentrate on it.In this paper,the application of HJM model in credit risk is studied.The article first introduces some basic idea of credit risk and some related financial mathematics knowledge.Second,standard HJM assumptions are listed.Further more,under fractional recovery of Treasury value scheme,the price for-mula of the defaultable bond which has only two credit ratings(pre-default and default)is given through HJM coefficients as the input.Besides,relationship between the above price formula and risk neutral pricing formula is established.Third,the price formula is expanded to multiple credit ratings and alternative recovery schemes.Finally,some applications of credit derivatives was discussed.