Physical Sciences and Mathematics Commons^™

Modelling Credit Value Adjustment Using Defaultable Options Approach, Sidita Zhabjaku

Electronic Thesis and Dissertation Repository

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 …