This lecture provides the theoretical foundation for the pricing of credit derivatives. For the valuation of univariate products, various specifications of so-called structural models are discussed. Then, focus is put on reduced form models, including popular examples. For the pricing of portfolio derivatives, copula models, multivariate structural models, and CIID models are investigated.

Learning outcomes

At the end of the module, students are able to analyse the risk involved in credit derivatives. They have a firm overview on commonly used default models (including their distinct advantages and shortfalls) and are able to use them to price credit derivatives.