Comments

Submission of this paper to the Faculty predates date of submission to the Digital Commons. This document was received by the Digital Commons on August 29, 2007 and posted on October 15, 2007. Original document was submitted as an honors thesis requirement.

Document Type

Article

Abstract

Credit default swaps, a traded financial instrument that provides credit protection in exchange for a periodic premium, is at the forefront of the exponential growth in the credit derivatives market, which has revolutionized the way credit risk is managed in recent years. This project offers a review into the application of option pricing theory in the valuation of default risk under a plain vanilla analysis and introduces a theoretical model that uses barrier options as a potential and perhaps more accurate tool for assessing default risk and its implications for valuing credit default swaps.

AppendixA&B(EuropeanBarrierModel)05.14.2007.xls (50 kB)
European Barrier Model

AppendixC(Americanbarriermodel)05.14.2007.xls (36 kB)
American Barrier Model