Hedging of Credit Derivatives in Models with Totally Unexpected Default

Abstract

AbstractThe paper analyzes alternative mathematical techniques, which can be used to derive hedging strategies for credit derivatives in models with totally unexpected default. The stochastic calculus approach is used to establish abstract characterization results for hedgeable contingent claims in a fairly general set-up. In the Markovian framework, we use the PDE approach to show that the arbitrage price and the hedging strategy for an attainable contingent claim can be described in terms of solutions of a pair of coupled PDEs.