Financial risk management models were often used wrongly prior to the 2007 credit crisis, and they are still being used wrongly today. This misuse contributed to the crisis. We show that there are two common misuses of derivative pricing models associated with calibration and hedging “the...

This paper reviews the literature on credit risk models. Topics included are structural and reduced form models, incomplete information, credit derivatives, and default contagion. It is argued that reduced form models and not structural models are appropriate for the pricing and hedging of...