Credit Risk Mitigation Based on Jarrow-Turnbull Model

Abstract

Credit risk mitigation tool (CRM) is an innovative credit risk management tool that pilot launched by the inter-bank market in 2010, it stripping and pricing the credit risk of commercial paper, medium-term notes, bank loans and other assets, and transferred the risk to other investment, their introduction radically changed the traditional features of credit risk management. Through analysis the pricing principle of CRM, draw the main factors of CRM pricing include risk-free interest rate, duration of CRM, exposure, the probability of default, loss given default and maturity of the underlying bond. CRM Pricing based on the financial engineering model- Jarrow-Turnbull, draw the conclusion that the appropriate risk-free interest is the interest rate of Treasury bill or the central bank bill, the model is suitable and reasonable for CRM pricing which having different term and different credit rating. According to the pricing results, Giving CRM pricing optimization solution like improving underlying database, exploring the basis of risk-free interest rate, innovation rating system, guiding the market diversification.