VULNERABLE OPTION

[kasoker]

HI DAVID

as u can see from my questions i am reviewnig stilzw on credit...

i saw your exal 6.f.3 adnd i didn't get the 2 sheet, what did u meant owith your remark?

as to my understand the 18.22 equation stulz' is the pricing of the credit derivative
please help

thanks

ktm

p.s

i noticed that have recantly nagged u alot, so apolagise, your answers realy helps...

 

[David Harper CFA FRM]

Hi ktm,

I apologize I am not sure i follow your question.
Does it possibly refer to Stulz 18.23, please see: http://forum.bionicturtle.com/viewthread/1749/

I think 18.23 is incorrect, but 18.22 does not trouble me

6.e.3 @ http://www.bionicturtle.com/premium/spreadsheet/6.e.3_vulnerable_swap/
... illustrates a simple interest rate swap

while 18.22 is not quite the same: it is the payoff of an instrument that would "keep us whole" if the counterparty risk on the vulnerable option were to materialize (the counterparty partially defaults and this instruments pays us the "gap" to keep us whole)... so 18.22 gives a entry into pricing the counterparty risk

(i welcome your questions, it is not nagging to me! I wish i could keep up a little better but that's why i am here, to learn and share learning)

David