Pricing and hedging credit-risky derivatives using corporate bonds

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dc.contributor.advisorAbraham, Haimen_ZA
dc.contributor.authorMurefu, Stephen Ngonidzasheen_ZA
dc.date.accessioned2014-09-08T09:52:17Z
dc.date.available2014-09-08T09:52:17Z
dc.date.issued2003en_ZA
dc.descriptionIncludes bibliographical references.en_ZA
dc.description.abstractThe benefits of being a bondholder are well appreciated and documented in the world of investments. However, most of these holdings are in the risk free (no chances of defaulting) government bonds (Treasuries). It follows then that by investing in the riskier bonds (corporate bonds); the investor should reap more benefits (higher returns). The argument lies in the trade off, yield and risk. higher yield results in higher credit risk (the probability of default is higher). The answer is to invest in corporate bonds and simultaneously find ways to minimise the credit risk associated with those purchases. Credit derivatives (options in particular for this paper) are financial instruments that can aid in the management of credit risk by insuring against adverse movements in the credit quality of the borrower. That is. if the borrower defaults, the bondholder will incur loss on the bond investment but the losses can be offset by gains in the credit derivative. The credit risk can be fully offset on condition that the credit derivative is priced and hedged properly. This paper looks at the use of the Hull & White Model and the Jarrow & Turnbull Model to price and hedge credit risky options using corporate bonds and their comparable Treasury bonds. The models are taken from their papers. ""The Price of Default"", (1992) and ""Pricing Derivatives on Financial Securities Subject to Credit Risk"", (1995), respectively. Their models develop procedures to estimate the expected loss of default on a derivative using the price of risky debt issued by the counterparty in the derivative contract.en_ZA
dc.identifier.apacitationMurefu, S. N. (2003). <i>Pricing and hedging credit-risky derivatives using corporate bonds</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,School of Economics. Retrieved from http://hdl.handle.net/11427/6954en_ZA
dc.identifier.chicagocitationMurefu, Stephen Ngonidzashe. <i>"Pricing and hedging credit-risky derivatives using corporate bonds."</i> Thesis., University of Cape Town ,Faculty of Commerce ,School of Economics, 2003. http://hdl.handle.net/11427/6954en_ZA
dc.identifier.citationMurefu, S. 2003. Pricing and hedging credit-risky derivatives using corporate bonds. University of Cape Town.en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Murefu, Stephen Ngonidzashe AB - The benefits of being a bondholder are well appreciated and documented in the world of investments. However, most of these holdings are in the risk free (no chances of defaulting) government bonds (Treasuries). It follows then that by investing in the riskier bonds (corporate bonds); the investor should reap more benefits (higher returns). The argument lies in the trade off, yield and risk. higher yield results in higher credit risk (the probability of default is higher). The answer is to invest in corporate bonds and simultaneously find ways to minimise the credit risk associated with those purchases. Credit derivatives (options in particular for this paper) are financial instruments that can aid in the management of credit risk by insuring against adverse movements in the credit quality of the borrower. That is. if the borrower defaults, the bondholder will incur loss on the bond investment but the losses can be offset by gains in the credit derivative. The credit risk can be fully offset on condition that the credit derivative is priced and hedged properly. This paper looks at the use of the Hull & White Model and the Jarrow & Turnbull Model to price and hedge credit risky options using corporate bonds and their comparable Treasury bonds. The models are taken from their papers. ""The Price of Default"", (1992) and ""Pricing Derivatives on Financial Securities Subject to Credit Risk"", (1995), respectively. Their models develop procedures to estimate the expected loss of default on a derivative using the price of risky debt issued by the counterparty in the derivative contract. DA - 2003 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2003 T1 - Pricing and hedging credit-risky derivatives using corporate bonds TI - Pricing and hedging credit-risky derivatives using corporate bonds UR - http://hdl.handle.net/11427/6954 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/6954
dc.identifier.vancouvercitationMurefu SN. Pricing and hedging credit-risky derivatives using corporate bonds. [Thesis]. University of Cape Town ,Faculty of Commerce ,School of Economics, 2003 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/6954en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentSchool of Economicsen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherEconomicsen_ZA
dc.titlePricing and hedging credit-risky derivatives using corporate bondsen_ZA
dc.typeMaster Thesis
dc.type.qualificationlevelMasters
dc.type.qualificationnameMComen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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