Options, Futures, Derivatives - University of Minnesota：期权，期货，衍生工具-明尼苏达大学_推荐.pdfVIP

Lecture 11 Credit Risk Options, Futures, Derivatives / March 3, 2008 1 Credit Risk Credit Risk arises from the probability that borrowers and counterparts in derivatives transactions may default. We attempt to quantify the risk associated to credit risk. Credit Ratings • Moody’s and SP provide ratings that describe the creditworthiness of corporate bonds. Moody’s Rating SP Rating Aaa AAA Aa AA A A Baa BBB Ba BB B B Caa CCC Bonds with Aaa rating are considered to have little to no chance of default. • Moody’s subdivides categories such as Aa to Aa1, Aa2, Aa3, etc. • SP subdivides categories such as AA to AA+, AA, AA−, etc. • Only Aaa or AAA are not subdivided. Options, Futures, Derivatives / March 3, 2008 2 Historical Default Probabilities We can consider the historical default rates of the certain class of corporate bonds: For example: • A bond with an initial credit rating of A has a 0.23% chance of defaulting by the end of the third year. • A bond with an initial credit rating of Caa has a 69.83% chance of defaulting by the end of the seventh year. Options, Futures, Derivatives / March 3, 2008 3 We can compute the probability of default for a particular year from the table. • The probability of a Ba bond defaulting in the third year is 6.00 − 3.48 = 2.52% • The probability of a Caa bond defaulting between the fifth and seventh year is 69.36 − 60.83 = 8.53% Th