The Pricing Of Credit Linked Notes Of A Basket Of Assets Baced On Markov Chain Model

Credit risk is a kind of risk faced by the bank,which is generally created when the borrowers can not meet their engagements in accordance with the contract.With continuous exploration and research,people found that using some credit derivatives appropriately can help reduce the credit risks.There are mainly four kinds of credit derivatives:credit default swaps,credit spread option,credit linked notes and total return swaps.Using the credit linked notes,can not only get fixed income,but also get a portion of the extra income(the combination of CDS and zero coupon bonds).In the management of credit risk,the application is also very extensive.As said:"Do not put all eggs in one basket".In reality,investors generally buy some zero coupon bonds issued by multiple companies with different default risks in order to disperse risks.And in order to control the harm,investors will buy insurances from the insurers,which constitutes a basket of credit linked notes.A basket of reference assets mostly contains more than three reference assets,so this paper deals with the pricing of Credit-Linked Notes with multiple reference assets.Respectively under the premise of considering the counterparty default risk as well as without considering counterparty default risk,this article mainly uses the method of Markov chains to price first default for a basket assets and verify the correctness of the formula by taking three assets in the most special basket of asset for example.The transition density matrix is given via the analysis of the cash flow in a basket of reference assets of CLN and the consideration of the corresponding state.With Markov Copula,we can work out the pricing formula of CLN with the construction of Maxkov chains.