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Recovery of Market Value

Dive into the valuation of defaultable claims, bonds, and derivatives in the credit risk market. Understand modeling term structures and recovery strategies. Seminar content from TU Kaiserslautern, January 17, 2011, presented by Dr. Frank Seifried and Andreas Gerwinski.

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Recovery of Market Value

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  1. Recoveryof Market Value Andreas Gerwinski Seminar CreditRisk Dr. Frank Seifried TU Kaiserslautern 17.Januar 2011

  2. Content • Chapter 1: Valuationofdefaultable Claims • a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate • Chapter 2: ValuationofDefaultable Bonds • Recoveryandvaluationofbonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds • Chapter 3: Pricing Bond andCredit Derivatives • Pricing a credit-spread put option D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  3. Content • Chapter 1: Valuationofdefaultable Claims • a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  4. Valuationofdefaultable Claims • modeling term structures of bonds and other contingent claims that are subject to default risk • default as an unpredictable event governed by a hazard rate process • parameterization of losses at default in terms of the fractional reduction in market value that occurs at default • fix some contingent claim that, if no default occurs, pays X at time T • Arbitrage-free setting in which all securities are priced in terms of some short-rate process r • and equivalent martingale measure Q • Under this “risk neutral” probability measure, • fractional loss in market value if default were to occur at time t, • conditional on the information available up to time t • this claim may be priced as if it were default-free by replacing the usual short-term interest rate process r with the default-adjusted short-rate process R=r +hL D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  5. Valuationofdefaultable Claims Valuationequationorgeneralpricingrelation D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  6. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  7. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  8. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  9. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  10. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  11. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  12. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  13. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  14. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  15. a discrete-time Motivation • Continuous-time valuation • Exogenousexpectedloss rate • a continuous-time Markovformulation • Price dependentexpectedloss rate Valuationofdefaultable Claims D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  16. Content • Chapter 2: ValuationofDefaultable Bonds • Recoveryandvaluationofbonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  17. Recoveryandvaluationofbonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  18. Recoveryandvaluationofbonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  19. Recoveryandvaluationofbonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  20. Recoveryandvaluationofbonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  21. Recoveryandvaluationofbonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  22. Recoveryandvaluationofbonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  23. Recoveryandvaluationofbonds • Valuation of noncallable corporate bonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  24. Recoveryandvaluationofbonds • Valuation of noncallable corporate bonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  25. Recoveryandvaluationofbonds • Valuation of noncallable corporate bonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  26. Recoveryandvaluationofbonds • Valuation of noncallable corporate bonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  27. Recoveryandvaluationofbonds • Valuation of noncallable corporate bonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  28. Recoveryandvaluationofbonds • Valuation of noncallable corporate bonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  29. Recovery and valuation of bonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuationofdefaultablecallablebonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  30. Recovery and valuation of bonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuation of defaultable callable bonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  31. Recovery and valuation of bonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuation of defaultable callable bonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  32. Recovery and valuation of bonds • Valuationofnoncallablecorporatebonds • a defaultable HJM model • Valuation of defaultable callable bonds ValuationofDefaultable Bonds D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  33. Content • Chapter 3: Pricing Bond andCredit Derivatives • Pricing a credit-spreadputoption D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  34. Pricing a credit-spreadputoption Pricing Bond andCredit Derivatives D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  35. Pricing a credit-spreadputoption Pricing Bond andCredit Derivatives D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  36. Pricing a credit-spreadputoption Pricing Bond andCredit Derivatives D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  37. Pricing a credit-spreadputoption Pricing Bond andCredit Derivatives D.DuffieandK.J.Singleton, Modeling Term Structuresofdefaultable Bonds

  38. Thankyouforyourattention!

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