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PDE approach to valuation and hedging of credit derivatives |
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| Authors: | Tomasz R Bielecki Monique Jeanblanc Marek Rutkowski |
| Institution: | 1. Department of Applied Mathematics , Illinois Institute of Technology , Chicago, IL 60616, USA;2. Département de Mathématiques , Université d'évry Val d'Essonne , 91025 évry Cedex, France;3. School of Mathematics , University of New South Wales , Sydney, NSW 2052, Australia;4. Faculty of Mathematics and Information Science , Warsaw University of Technology , 00-661 Warszawa, Poland |
| Abstract: | This paper presents a PDE approach in a Markovian setting to hedge defaultable derivatives. The arbitrage price and the hedging strategy for an attainable contingent claim are described in terms of solutions of a pair of coupled PDEs. For some standard examples of defaultable claims, we provide explicit formulae for prices and hedging strategies. |
| Keywords: | Credit derivatives Hedging Valuation PDE approach |