Risky caplet pricing with backward-looking rates
The Hull-White model for short rates is extended to include compounded rates and credit risk
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Colin Turfus extends the Hull-White short-rate model to include the integrated short rate as a separate independent variable and to incorporate credit default risk, governed by a Black-Karasinski model, into cashflows. He derives an analytic representation of the associated pricing kernel, and applies it to the pricing of risky compounded interest rate payments that
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