Default risk and derivative products

Applied Mathematical Finance

Volumn 3, Issue 1, 1996, Pages 53-70

  Cooper, Ian ^a   Martin, Marcel ^a  

^a LONDON BUSINESS SCHOOL   (United Kingdom)

Author keywords

Credit risk; Default risk; Derivative products; Risky debt

Indexed keywords

EID: 0003109912     PISSN: 1350486X     EISSN: 14664313     Source Type: Journal    
DOI: 10.1080/13504869600000003     Document Type: Article

References (85)

1. Abken, P.A., 1993. Valuation of default-risky interest rate swaps. Advances in Futures and Options Research, 6: 93–116.
2. Arak, M., Estrella, A., Goodman, L., and Silver, A., 1988. Interest rate swaps: an alternative explanation. Financial Management, 17: 12–18.
3. Arak, M., 1992. The effect of the new risk-based capital requirements on the market for swaps. J. Financial Services Res., 6: 25–36.
4. Artzner, P., and Delbaen, F., 1994. Default risk insurance and incomplete markets. Mathematical Finance, 5: 187–195.
5. Babbs, S.H., 1991. “ Interest rate swaps and default-free bonds: a joint term structure model ”. In FORC Preprint:91/27, University of Warwick.
6. Barrett, J., Moore, G., and Wilmott, P., 1992. Inelegant efficiency. Risk, 5.9: 82–84.
7. Bicksler, J., and Chen, A.H., 1986. An economic analysis of interest rate swaps. J. Finance, 41: 645–656.
8. Black, F., and Cox, J.C., 1976. Valuing corporate securities: some effects of bond indenture provisions. J. Finance, 31: 351–367.
9. Black, F., and Scholes, M., 1973. The pricing of options and corporate liabilities. J. Political Economy, 81: 637–659.
10. Boyle, P.P., 1977. Options: a Monte Carlo approach. J. Financial Economics, 4: 3223–3238.
11. Brealey, R.A., and Myers, S.C., 1991. Principles of Corporate Finance, McGraw-Hill.
12. Brennan, M.J., and Schwartz, E.S., 1977. Convertible bonds: valuation and optimal strategies for call and conversion. J. Finance, 32: 1699–1715.
13. Brennan, M.J., and Schwartz, E.S., 1980. Analysing convertible bonds. J. Financial and Quantitative Analysis, 15: 907–929.
14. Brown, K.C., and Smith, D.J., 1993. Default risk and innovations in the design of interest rate swaps. Financial Management, 22: 94–105.
15. Brown, K.C., Harlow, W.V., and Smith, D.J., 1994. An empirical analysis of interest rate swap spreads. J. Fixed Income, March: 61–78.
16. Buoncuore, A., Nobile, A.G., and Ricciardi, L.M., 1987. A new integral equation for the evaluation of firstpassage time probability densities. Advances in Applied Probability, 19: 784–800.
17. Campbell, T.S., and Kracaw, W.A., 1991. Intermediation and the market for interest rate swaps. J. Financial Intermediation, 1: 362–384.
18. Cooper, I.A., and Mello, A.S., 1988. Default spreads in the fixed and in the floating interest rate markets: a contingent claims approach. Advances in Futures and Options Res., 3: 269–289.
19. Cooper, I.A., and Mello, A.S., 1991. The default risk of swaps. J. Finance, 46: 597–620.
20. Cox, J.C., Ingersoll, J.E., and Ross, S.A., 1980. An analysis of variable rate loan contracts. J. Finance, 15: 389–403.
21. Cox, J.C., Ingersoll, J.E., and Ross, S.A., 1985. A theory of the term structure of interest rates. Econometrica, 53: 385–407.
22. Cox, J.C, Ross, S.A., and Rubinstein, M., 1979. Option pricing: a simplified approach. J. Financial Economics, 7: 229–263.
23. Duffee, G.R. (1995) On measuring credit risks of derivative instruments. Working Paper.
24. Duffie, D. and Singleton, K. (1995) Econometric modelling of the term structure of defaultable bonds. Working Paper, Graduate School of Business, Stanford University.
25. Duffie, D., Schroder, M. and Skiadas, C. (1995) Recursive valuation of defaultable securities and the timing of the resolution of uncertainty. Working Paper, Graduate School of Business, Stanford University.
26. Federal Reserve Board and Bank of England (1987) Potential credit exposure on interest rate and foreign exchange related instruments.
27. Flesaker, B., Hughston, L., Schreiber, L., and Sprung, L., 1994. Taking all the credit. Risk, 7.9: 104–108.
28. Fons, J.S., 1994. Using default rates to model the term structure of credit risk. Financial Analysts J., September-October: 25–32.
29. Franks, J.R., and Torous, W.N., 1994. A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations. J. Financial Economics, 35: 349–370.
30. Geske, R., 1977. The valuation of corporate liabilities as compound options. Journal of Financial and Quantitative Analysis, 12: 541–552.
31. Geske, R., and Shastri, K., 1985. Valuation by approximation: a comparison of alternative option valuation techniques. J. Financial and Quantitative Analysis, 20: 45–71.
32. Giberti, D., Mentini, M. and Scabellone, P. (1993) The valuation of credit risk in swaps: methodological issues and empirical results. Working Paper, Centre for Research in Finance-IMI Group.
33. Grinblatt, M. (1994) An analytic solution for interest rate swaps. Working Paper, Anderson Graduate School of Management, UCLA.
34. Group of Thirty (1993) Working Paper of the Credit Risk Measurement and Management Subcommittee.
35. Harrison, H.J., and Kreps, D.M., 1979. Martingales and arbitrage in multiperiod securities markets. J. Economic Theory, 20: 381–408.
36. Heath, D., Jarrow, R.J., and Morton, A., 1992. Bond pricing and the term structure of interest rates: a new methodology for contingent claims valuation. Econometrica, 60: 77–105.
37. Ho, T., and Singer, R.F., 1984. The value of corporate debt with a sinking-fund provision. J. Business, 57: 315–336.
38. Ho, T.S.Y., and Lee, S., 1986. Term structure movements and pricing interest rate contingent claims. J.Finance, 41: 1011–1029.
39. Hull, J., 1989. Assessing credit risk in a financial institution's off-balance sheet commitments. J. Financial and Quantitative Analysis, 24: 489–501.
40. Hull, J., and White, A., 1995. The impact of default risk on the prices of options and other derivative securities. J. Banking and Finance, 19: 299–322.
41. Iben, B., and Brotherton-Ratcliffe, R., 1994. Credit loss distributions and required capital for derivatives portfolios. J. Fixed Income, 3: 6–14.
42. Ingersoll, J.E., 1987. Theory of Financial Decision Making, Rowman and Littlefield.
43. Jamshidian, F., 1994. Hedging quantosdiff-swaps and ratios. Applied Mathematical Finance, 1: 1–20.
44. Jarrow, R.A., and Turnbull, S.M., 1995. Pricing derivatives on financial securities subject to credit risk. J. Finance, 50: 53–85.
45. Jarrow, R.A., Lando, D. and Turnbull, S.M. (1994) A Markov model for the term structure of credit risk spreads. Working Paper.
46. Johnson, H., and Stulz, R., 1987. The pricing of options with default risk. J. Finance, 48: 267–280.
47. Jones, E.P., Mason, S.P., and Rosenfeld, E., 1984. Contingent claims analysis of corporate capital structures: an empirical investigation. J. Finance, 39: 611–627.
48. Kau, J.B., and Keenan, D.C., 1995. An overview of the option-theoretic pricing of mortgages. J. Housing Res., 6: 217–244.
49. Lando, D. (1994) Three essays in contingent claims pricing. PhD Thesis, City: Cornell University.
50. Litzenberger, R.H., 1992. Swaps: plain and fanciful. J. Finance, 47: 831–850.
51. Litterman, R., and Jben, T., 1991. Corporate bond valuation and the term structure of credit spreads. Financial Analysts' J., Spring: 52–64. (1988)
52. Longstaff, F.A., 1991. The valuation of options on yields. J. Financial Economics, 26: 97–121.
53. Longstaff, F.A., and Schwartz, E.S., 1995a. A simple approach to valuing risky and floating rate debt. J. Finance, 50: 789–819.
54. Longstaff, F.A., and Schwartz, E.S., 1995b. Valuing credit derivatives. J. Fixed Income, 5.1: 6–12.
55. Lucas, D.J., 1995a. The effectiveness of downgrade provisions in reducing counterparty risk. J. Fixed Income, 4: 32–41.
56. Lucas, D.J., 1995b. Default correlation and credit analysis. J. Fixed Income, 4: 76–87.
57. Madan, D.B. and Unal, H. (1992) Pricing the risks of default. Working Paper, University of Maryland.
58. Mason, S.P., and Bhattacharya, S., 1981. Risky debt, jump processes, and safety covenants. J. Financial Economics, 9: 281–307.
59. Merton, R.C., 1974. On the pricing of corporate debt: the risk structure of interest rates. J. Finance, 29
60. Myers, S.C., 1977. Determinants of corporate borrowing. Journal of Financial Economics, 5: 146–175.
61. Paskov, S. and Traub, J. (1995) Faster valuation of financial derivatives. Working Paper, Department of Computer Science, Columbia University.
62. Pitts, C., and Selby, M., 1983. The pricing of corporate debt: a further note. J. Finance, 38: 1311–1313.
63. Ramaswamy, K., and Sundaresan, S.M., 1986. Valuation of floating rate instruments. J. Financial Economics, 17: 251–272.
64. Rendleman, R.J., 1992. How risks are shared in interest rate swaps. J. Financial Services Res., 7: 5–34.
65. Rowe, D., 1993. Curves of confidence. Risk, 6.11: 52–55.
66. Selby, M.J.P., Franks, J.R., and Karki, J.P., 1988. Loan guarantees, wealth transfers and incentives to invest. J. Industrial Economics, 37: 47–65.
67. Shimko, D.C., Tejima, N., and Van Deventer, D.R., 1993. The pricing of risky debt when interest rates are stochastic. J. Fixed Income, 3: 58–65.
68. Smith, T., 1993. The new credit derivatives. Global Finance, 7: 109–110.
69. Smithson, C., 1995. Credit derivatives. Risk, 8.12
70. Solnik, B., 1990. Swap pricing and default risk: a note. J. International Financial Management and Accounting, 2: 79–91.
71. Sorensen, E.H., and Bollier, T.F., 1994. Pricing swap default risk. Financial Analysts' J., May-June: 23–33.
72. Sundaresan, S.M., 1991. “ Valuation of swaps ”. In Recent Developments in Banking and Finance, Edited by: Khoury, S., Vol. IV and V, North Holland.
73. Titman, S., 1992. Interest rate swaps and corporate financing choices. J. Finance, 47: 1503–1516.
74. Titman, S., and Torous, W., 1989. Valuing commercial mortgages: an empirical investigation of the contingent-claims approach to pricing risky debt. J. Finance, 44: 345–373.
75. Turnbull, S.M., 1987. Swaps: a zero sum game?. Financial Management, 16: 15–21.
76. US General Accounting Office (1994) Report to the US Congress: Financial Derivatives, Actions Needed to Protect the Financial System.
77. Usmen, N. (1993) Currency swaps, financial arbitrage and default risk. Working Paper, Rutgers University.
78. Vasicek, O., 1977. An equilibrium characterization of the term structure. J. Financial Economics, 5: 177–188.
79. Van Duyn, A., 1995. Credit risk for sale. Any buyers?. Euromoney, April: 41–43.
80. Wall, L.D., 1989. Interest rate swaps in an agency theoretic model with uncertain interest rates. J. Banking and Finance, 18: 261–270.
81. Wall, L.D., and Pringle, J.J., 1989. Alternative explanations of interest rate swaps: a theoretical and empirical analysis. Financial Management, 18: 59–73.
82. Warner, J.B., 1977. Bankruptcy costs: some evidence. J. Finance, 32 (2): 337–348.
83. Weinstein, M.I., 1983. Bond systematic risk and the option pricing model. J. Finance, 38: 1415–1429.
84. Wilson, D., 1994. In good company. Risk, 7.8: 35–39.
85. Yawitz, J.B., Maloney, K.J., and Ederington, L.H., 1985. Taxes, default risk and yield spreads. J. Finance, 50 (4): 1127–1140.