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Price Credit Derivative Instruments

Create credit derivative instrument object, associate the object with a model, and specify pricing method

A credit derivative is a financial instrument designed to separate and then transfer the risk of an event of credit default to an entity other than the debtholder. A credit default swap is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap’s seller up until the maturity date of a contract. In return, the seller agrees that, in the event that the debt issuer defaults or experiences another credit event, the seller will pay the buyer the security’s premium as well all interest payments that would have been paid between that time and the security’s maturity date. A credit default swap is, in effect, insurance against non-payment. This toolbox provides functionality to price credit default swaps and credit default swap options. Also, you can compute the default probability and hazard rate values from market data.

The object-based framework supports a workflow for creating instruments, models, and pricer objects to price financial instruments. Using these objects, you can price interest-rate, inflation, equity, commodity, FX, or credit derivative instruments. The object-based workflow is an alternative to pricing financial instruments using functions. Working with modular objects for instruments, models, and pricers, you can easily reuse these objects to compare instrument prices for different models and pricing engines. You can use the object-based workflow to price a single instrument or to price a collection of instruments in a portfolio. For more information on the workflow, see Get Started with Workflows Using Object-Based Framework for Pricing Financial Instruments.

Create a credit derivative object using fininstrument, associate the object with a model using finmodel, and then specify a pricing method using finpricer.

Functions

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fininstrumentCreate specified instrument object type
finmodelCreate specified model object type
finpricerCreate pricing method
priceCompute price for credit derivative instrument with Credit pricer
priceCompute price for interest-rate, equity, or credit derivative instrument with Analytic pricer
defprobcurveCreate defprobcurve object for credit instrument
survprobsCompute survival probability based on default probability curve
hazardratesCompute hazard rates based on default probability curve
defprobstripBootstrap defprobcurve object from market CDS instruments

Objects

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CDSCDS instrument object
CDSOptionCDSOption instrument object
CDSBlackCreate CDSBlack model object for CDSOption instrument
defprobcurveCreate defprobcurve object for credit instrument
CreditCreate Credit pricer object for CDS instrument using defprobcurve
CDSBlackCreate CDSBlack pricer object for CDSOption instrument using CDSBlack model

Examples and How To

Bootstrapping a Default Probability Curve from Credit Default Swaps

This example shows how to bootstrap a default probability curve for CDS instruments.

Concepts

Get Started with Workflows Using Object-Based Framework for Pricing Financial Instruments

Use objects to model and price financial instruments.

Choose Instruments, Models, and Pricers

Select instruments, associated models, and associated pricers.

Mapping Financial Instruments Toolbox Functions for Credit Derivative Instrument Objects

The following table lists the Financial Instruments Toolbox™ functions for credit derivative instruments mapped to the associated workflow using the object-based framework for instruments, models, and pricers.

Supported Exercise Styles

The following table lists the interest-rate instrument objects with their associated models and pricers and supported Exercise styles.

Mapping Financial Instruments Toolbox Functions to Object-Based Framework for Instruments, Models, and Pricers

Mapping functions to a workflow using objects for instruments, models, and pricers.

Featured Examples