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Pricing Certificates Under Issuer Risk

In: Alternative Investments And Strategies

Author

Listed:
  • BARBARA GÖTZ

    (HVB-Stiftungsinstitut für Finanzmathematik, Technische Universität München Boltzmannstrasse 3, 85748 Garching, Germany)

  • RUDI ZAGST

    (HVB-Stiftungsinstitut für Finanzmathematik, Technische Universität München Boltzmannstrasse 3, 85748 Garching, Germany)

  • MARCOS ESCOBAR

    (Department of Mathematics, Ryerson University, 350 Victoria St. Toronto, M5B 2K3, Ontario, Canada)

Abstract

Certificates have become very popular in Germany, Austria, and Switzerland in the last few years. From a technical and legal point of view they are bonds. Thus, their value actually also depends on the rating and creditworthiness of the issuing company. This aspect is in general neglected in the pricing of these products. In the following, we present a model which overcomes this lack and incorporates the default risk of the issuing company in the pricing.We derive closed-form expressions for index, basket, and bonus certificates under issuer risk in a Black–Scholes model framework. The results are analyzed for different scenarios and compared with valuations in a model which neglects issuer risk.

Suggested Citation

  • Barbara Götz & Rudi Zagst & Marcos Escobar, 2010. "Pricing Certificates Under Issuer Risk," World Scientific Book Chapters, in: Rüdiger Kiesel & Matthias Scherer & Rudi Zagst (ed.), Alternative Investments And Strategies, chapter 6, pages 123-146, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814280112_0006
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