Study On The Credit Derivatives Pricing

At all times credit risk has been ranked as the most basic and antiquated as well as harmful kind of risk in financial market. Recently, it has been received vast attention once more in financial realm. However, due to the credit risk's characteristic of revenue deviation and absence of defaulting data, for the long time control of credit risk relies on internal control and diversification while lacking the hedging tools. In 90s of 20th century, a kind of new, innovative credit risk management product– credit derivatives appear, which, for the first time, let credit risk management have the same hedging capability as market risk management, fundamentally changes the way of credit risk management. The product can separate credit risk away from financial portfolio without selling or diminishing asset with in Balance Sheet, which will reduce exposure level to credit risk. Such risk derivative will be priced and sold to investors who are willing to take risk. As the most important tool to manage or hedge the credit risk in the modern financial market, credit derivative had played the key role in the recent financial crisis.So the core part of the research is how to price these credit derivatives products effectively. This article analyzed the recent development of global credit derivatives first and point out the necessary of developing of China's credit derivatives market. Second, this article introduce the background of the surge of this market, especially the most widely used 5 kinds of products and the mechanism of them. The core of this article is concluding the two significant varieties of the pricing model----default rate and recovery rate. Then I use the single factor model to study the three typical products, such as credit default swap, credit-linked note, and options on credit differentials. Finally, the article studied the feasibility of developing credit derivatives and the choice of products. At last, I brought out several suggestions according the financial crisis.