This dissertation examines the pricing of the same credit risk in two currencies, and
hence the valuation of credit-contingent foreign exchange products. Such pricing
hinges upon the dependence of the credit risk and the foreign exchange rate. We recall
the reduced-form model proposed by Ehlers (2007), which allows credit-currency
dependence through correlation between the Brownian motions driving the default
intensity and the exchange rate, and through a jump in the exchange rate at the
default time. Four basic specifications of this model are considered. Two of these
specifications have not previously appeared in the literature and one of these, based
on a lognormal process for the default intensity, proves to be especially useful and
tractable. The problem of hedging defaultable claims in one currency with similar
claims in another is briefly considered, and it is shown that hedging against the
default event and against credit spread movements are not in general equivalent.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:wits/oai:wiredspace.wits.ac.za:10539/11955 |
| Date | 18 September 2012 |
| Creators | Truter, Gavin Kenneth |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | application/pdf, application/pdf |
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