Abstract and Keywords
Credit derivatives are contracts whose payouts reference credit events. Depending upon the precise terms of the contract, credit events may include not just the default of a company, but also other events such as restructuring or conservatorship. These subtle differences of definition make little difference in the benign stages of the credit cycle, but when credit events start occurring, they assume high importance. This article begins by summarising some of the most common credit derivative contracts. It then analyses the Gaussian copula model, other copula models, base correlations, pricing bespoke collateralised debt obligations, developments since the Gaussian copula and base correlations, the portfolio loss distribution, and stochastic recovery.
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