Monte Carlo method and credit derivatives

In recent years, the use of credit derivatives to hedge credit risk is becoming increasingly popular. Current advances by both practitioners and academic researchers in the area of fast convergence methods make Monte Carlo simulations more and more frequently the method of choice to value credit derivatives. Our goal is to increase the efficiency of the Monte Carlo method by using variance reduction techniques with the main focus lying on importance sampling. To achieve this, sampling is restricted to the region of importance where the evaluated indicator function of the credit default times does not vanish. This technique is then applied to the one- and multi-dimensional credit case where we will derive exponential as well as normal importance sampling densities.