We propose a fairly general framework which allows one to perform Credit Value Adjustment (CVA) computations for a contract with bilateral counterparty risk in the presence of (a) systemic risk and (b) wrong-way or right-way risks. Our methodology focuses on the role of alternative settlement...

We depart from the usual methods for pricing contracts with the counterparty credit risk found in most of the existing literature. In effect, typically, these models do not account for either systemic effects or at-first-default contagion and postulate that the contract value at default equals...

A new approach to modeling credit risk, to valuation of defaultable debt and to pricing of credit derivatives is developed. Our approach, based on the Heath, Jarrow, and Morton (1992) methodology, uses the available information about the credit spreads combined with the available information...

In this note we sketch an initial tentative approach to funding costs analysis and management for contracts with bilateral counterparty risk in a simplified setting. We depart from the existing literature by analyzing the issue of funding costs and benefits under the assumption that the...

Properties of conditional expectation and metric projection for multivariate symmetric stable distributions are studied. Linear filtering, smoothing, and prediction problems for a discrete time stable linear model with constant coefficients are solved.

The aim of the present paper is mostly expository, namely, we intend to provide a concise presentation of arbitrage pricing and hedging of European contingent claims within the Heath, Jarrow and Morton frame-work introduced in Heath et al. (1992) under deterministic volatilities. Such a special...

The backward induction approach is systematically used to produce various models of forward market rates. These include the lognormal model of forward Libor rates examined by Miltersen et al. and Brace et al., as well as the lognormal model of (fixed-maturity) forward swap rates, which was...

This paper is the first in a series that we devote to studying the problems of valuation and hedging of defaultable game options in general, and convertible corporate bonds in particular. Here, we present mathematical foundations for our overall study. Specifically, we provide several results...

The innovative information-based framework for credit risk modeling, proposed recently by Brody, Hughston, and Macrina, is extended to a more general and practically important setup of random interest rates. We first introduce the market model, and we derive an explicit expression for...