Although the credit derivatives market has developed within the past decade, the foundations for pricing were put in place much earlier than that. The Black-Scholes and Merton insights into option pricing led to a model in which the default probability or debt of a company is priced endogenously as a derivative on the underlying firm's value.
This approach, with many extensions (coupons, converts, stochastic interest rates, random barriers), has been a popular method to measure dynamic credit
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