Pricing credit derivatives in a 'Libor Market Model'

Diploma Thesis from the year 2002 in the subject Business economics - Investment and Finance, grade: 1,0, University of Bonn (Institut für Gesellschafts- und Wirtschaftswissenschaften, Statistische Abteilung), language: English, abstract: The growing importance of credit derivatives creates the need to price them in a market consistent manner. In this thesis the well known and accepted Libor Market Model is extended following Schönbucher (2000). The thesis consists of two main parts: one describing and explaining the theoretical framework that will yield the pricing formulae for credit derivatives, and a second part explaining how to practically implement and calibrate the model. The second part also reports results of our implementation. We show that approximations introduced by Schönbucher (2000) hold and that the model can be used to price defaultable bonds, credit default swaps as well as options on credit default swaps.

The thesis has been written at the Department of Statistics, University of Bonn in cooperation with Deutsche Postbank AG Credit Risk Management.