Last option before the armageddon

explosion

Damiano Brigo and Massimo Morini show how the pricing of credit index options depends on the probability of a financial portfolio 'armageddon'. They introduce a new equivlent pricing measure that lays the foundation for a market model framework in multi-name credit risk, leading also to practical implementation advantages. Examples show the formula has become more relevant after the beginning of the credit crisis of 2007.

 

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