Modelling Credit Value Adjustment Using Defaultable Options Approach

This thesis calculates Credit Value Adjustment on defaultable options. The prices of default- able European options are computed through analytical, quadrature approximation and Monte Carlo simulations under the assumption of a constant rate of default. Subsequently, we propose to inversely relate the company’s instantaneous rate of default to its underlying stock price, re- sulting in a non-constant rate of default. This allows for a new approach to estimate the default of company different from previous work where default is calculated through historical data. The rationale behind this idea relies on the fact that price of the stock plunges before the event of default. For a given set of option parameters, we show that it is possible to find an optimal intensity, which produces the same prices of European options under a simpler framework. However, this intensity fluctuates with changes in other parameters. Implementation details and analysis of the results are provided.

Name thesis:degree_name

M Sc

Discipline thesis:degree_discipline

Statistics and Actuarial Sciences

Grantor dc:publisher

The University of Western Ontario

Year dc:date.issued

2013

Author dc:creator

• Zhabjaku, Sidita

Advisor dc:contributor.advisor

• Matt Davison

• Defaultable Options
• Credit Value Adjustment
• Poisson Process

Language dc:language.iso

en_ca

Handle dc:identifier.uri

https://hdl.handle.net/20.500.14721/36437

OAI identifier oai:identifier

oai:uwo.scholaris.ca:20.500.14721/36437