The Research Of Credit Risk Mitigation Warrant’s Pricing

A credit derivative is a bilateral contract that aims to transfer,restructure,and convert credit risk.The two parties to the contract use credit derivatives to increase or decrease the credit risk commitment of an economic entity.In this contract,one party will Credit risk to another party.In foreign markets,CDS is a necessary financial instrument when defending against credit risk,and it is a new type of financial derivative tool developed for managing credit risk in the 1990 s.It is the most issued credit derivatives in foreign financial markets,which can help investors to effectively avoid and transfer credit risk.Credit derivative products have been developed in foreign countries for decades,and domestic credit derivative products have started to appear very late.It was not until October 2010 that China ’s inter-bank market officially established a credit risk mitigation tool pilot.Also known as the "China CDS",credit risk mitigation tools play a key role in China’s credit risk management.In recent years,with the increasing number of non-performing loans and the gradual exposure of default risks in the bond market,domestic financial institutions have faced increasingly severe credit risk challenges.In the early stage of credit risk mitigation tools,pricing research is a crucial step in the development of credit risk mitigation tools in the domestic market.This paper summarizes the relevant domestic and foreign literature studies of the two pricing models,elaborate on the theoretical basis,derivation process,and scope of application of the structured model and the simplified model.The advantages and disadvantages of these two models are compared and analyzed.The essential reason for defaults is that it is more appropriate to use a structured model to price credit risk mitigation instruments in the domestic market.Therefore,this paper chooses a structured model as the theoretical pricing model for the case.In the case analysis part,first analyze the transaction body and transaction structure of the case product,think that the case has a certain representativeness in the domestic credit derivatives market;then use the credit risk measurement model KMV model to estimate the sample period The expected default probability of the underlying bond.Then the theoretical price of the case product in this paper is calculated according to the risk neutrality and no arbitrage theory of the pricing principle of credit risk mitigation instruments.Finally,the theoretical price obtained in this paper is compared with the actual issue price to analyze the rationality of the theoretical price and the reason for the difference.The conclusion of this article holds that it is more practical and scientific to use a structured model to price credit risk mitigation instruments.To make a deeper exploration for the large-scale launch of credit risk mitigation tools in the domestic market in the next stage,it has a great reference value for application.In addition,relevant policy recommendations are proposed to improve the pricing of credit risk mitigation tools,the application of credit risk mitigation tools in the Chinese market,and the orderly and standardized development.