Pricing default baskets

Nicholas Dunbar, Risk’s technical editor, introduces the first in a new series of technical papers written by quants at Deutsche Bank.“Default correlation has been one of the hottest topics in credit derivatives over the past year. So it is a pleasure to welcome Deutsche Bank – a big player in this market – to inaugurate our second Masterclass series with an article on the pricing of basket default swaps. The main problem in valuing such instruments lies in the modelling of default dependencies. Here, Wolfgang Schmidt and Ian Ward investigate aspects of pricing and hedging using an approach based on copulas, with particular focus on the impact of defaults on the spread of remaining credits.”

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