Abstract
Considering the feasibility in China’s market and adopting existing pricing models on financial guaranty products and credit derivatives, a pricing model on financial guaranty products is built under the actuarial methodology. In the model, the geometric Brownian motion with correlation is chosen as the default process, the most prudent principle is applied to the calibration of the model and the Beta distribution is proposed to approximate the loss given default (LGD).
Highlights
With the strong support of the country, credit guaranty companies funded by the government or other nonprofit organization appeared in China
As an important theory branches, structural model can be applied to the credit derivatives and financial guaranty products, which regards fluctuations of enterprise value over time as a geometric Brownian motion, assumes corporate defaults as enterprise value below a certain critical value, and uses the value of put option to describe the value of credit risk transfer
According to the thought of Pluto and Tasche (2006), this paper firstly summarizes the general definition of the most prudent principle
Summary
With the strong support of the country, credit guaranty companies funded by the government or other nonprofit organization appeared in China. Guaranty industry has undergone a rapid development. China's credit guaranty industry has begun to take shape. Traditional credit guaranty business is not enough to constitute a complete financial guaranty system. In Chinese market, even credit guaranty products with the easiest structure and trading mechanisms do not fully develop to meet the needs of social development. The country has paid more attention to the financing channel of medium and small-sized enterprises. In this background, in-depth study of the financial guaranty products has more important significance for the future development of China's financial industry
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