Valuing credit derivatives in a jump-diffusion model

Abstract

This paper presents a simple framework for valuing single-name credit derivatives in jump-diffusion models. The Gaver–Stehfest algorithm is used to calculate the CDS spread when the value of the reference entity is assumed to the double exponential jump-diffusion process. We model directly the credit spread using a geometric Ornstein–Uhlenbeck process with a jump and derive the pricing formula for credit spread option.