Valuation Of Credit Derivatives

This paper pays more attention to the credit derivatives since the outbreak of the financial crisis. Many people hold the idea that CDS (the main product of the credit derivatives) is the root cause of financial crisis. On the other hand, credit derivatives are still the essential tool to manage and control the credit risk in the financial market. Thus, it is really important to do deep research on the pricing theory of the credit derivatives and understand both the positive and negative effects of these products, which can help us to use the credit derivatives in right way.First, this paper introduces the credit derivatives market and the classes of the credit derivatives, and then introduces the history of the pricing theory of the credit derivatives from two aspects:Structural Model and Reduced-form Model. In the second chapter, some representative models are introduced in detail, such as Merton Model, FPM Model and Intensity Model. In the third chapter, based on the Jarrow&Yu's Model, we consider the pricing problem for corporate bonds with counterparty risk, furthermore, a geometrical attenuation function is introduced to reflect the correlated default intensities, and we derive the pricing formula for the corporate bonds under the recovery of market value. Finally in the fourth chapter, those models are applied to set the price of credit default swaps.