Combining Market and Credit Risk
The valuation approach detailed in Chap. 4 is centered on estimating the distribution of future values of a transaction after having simulated trajectories of the underlying stochastic drivers. When markets are complete, the pricing-by-arbitrage paradigm allows us to price stochastic payoffs as an expectation in a particular measure, namely the one under which the prices of assets are martingales when expressed in units of a chosen numeraire.
KeywordsCredit Risk Call Option Martingale Measure Default Probability Coherent Risk Measure
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