Credit Risk Mitigation and its valuation –credit derivatives in ChinaTools Wu, Cai (2011) Credit Risk Mitigation and its valuation –credit derivatives in China. [Dissertation (University of Nottingham only)] (Unpublished)
AbstractCredit derivatives have experienced a dramatical growth in developed market during the past decades. Main function of credit derivatives is to transfer and diversify credit risks. Credit risk is a serious issue in Chinese financial market, especially in bank system. With such background, Credit Risk Mitigations were introduced to China’s domestic market in November 2010. Credit Risk Mitigations include Credit Risk Mitigation Agreements and Credit Risk Mitigation Warrants (CRMWs). This study examines CRMWs in detail and uses two approaches adjusted from Hull-White reduced form model and no-arbitrage argument to estimate CRMW premium. The differences between CRMW and credit default swap are explained. The difference of their premium payment time is paid most attention as it influences the premium estimation process. Risk-neutral default probability density is respectively assumed as a step function and a continuous piecewise linear function. 10 CBIC CRMW003 is selected as the real CRMW to be estimated. All estimated premiums are higher than the observed market one. This difference could be explained by factors such as liquidity risk and counterparty risk.
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