Classic option pricing theory values a derivative contract via dynamic replication, and views the derivative as redundant relative to the replicating portfolio. In practice, while dynamic replication proves highly effective in drastically reducing the risk in derivative investments, the...

This paper examines the capability of firm fundamentals in explaining the cross-sectional variation of credit default swap (CDS) spreads. The paper constructs a fundamental-based CDS valuation by combining the Merton distance-to-default measure with a long list of firm fundamental...