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Credit Risk and Prepayment Option

Published online by Cambridge University Press:  29 August 2014

Philippe Artzner  and
Freddy Delbaen
Philippe Artzner*
Affiliation:
Université Louis Pasteur
Freddy Delbaen*
Affiliation:
Vrije Universiteit Brussel
*
Institut de Recherches Mathématiques Avancéeset Labor atoire de Recherches en Gestion, 7 rue René Descartes, F 67084 Strasbourg Cedex, FranceA18604@FRCCSC21.
Department of Mathematics and Information Sciences, V.U.B., Institute of Actuarial Sciences, Pleinlaan 2, B 1050 Brussels, Belgiumfdelbaen@tena2.vub.ac.be.
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Abstract

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The paper examines a type of insurance contract for which secondary markets do exist: default risk insurance is implicit in corporate bonds and other risky debts. It applies risk neutral martingale measure pricing to evaluate the option for a borrower with default risk, to prepay a fixed rate loan. A simple “matchbox” example is presented with a spreadsheet treatment.

Keywords

C-1 riskC-3 riskcredit risk insurancedefault riskinterest rate riskfinancial reserveinsurance reservemarket valuesmartingaleoptimal stoppingpremium processrisk processswapswaption
Type
Workshop
Information
ASTIN Bulletin: The Journal of the IAA , Volume 22 , Issue 1 , May 1992 , pp. 81 - 96
Copyright
Copyright © International Actuarial Association 1992

References

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