26.1 Chapter 26 Credit risk Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 26.1 Chapter 26 Credit Risk
26.2 Credit Ratings In the s&P rating system, AAA is the best rating. After that comes AA, A BBB,BB.B and ccc The corresponding Moody' s ratings are Aaa Aa,A Baa. Ba,B. and caa Bonds with ratings of BBB (or Baa)and above are considered to be investment grade Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 26.2 Credit Ratings • In the S&P rating system, AAA is the best rating. After that comes AA, A, BBB, BB, B, and CCC • The corresponding Moody’s ratings are Aaa, Aa, A, Baa, Ba, B, and Caa • Bonds with ratings of BBB (or Baa) and above are considered to be “investment grade
26.3 Information from bond Prices Traders regularly estimate the zero curves for bonds with different credit ratings This allows them to estimate probabilities of default in a risk-neutral world Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 26.3 Information from Bond Prices • Traders regularly estimate the zero curves for bonds with different credit ratings • This allows them to estimate probabilities of default in a risk-neutral world
26,4 Typical Pattern (See Figure 26.1, page 611) Baa/BBB Spread over Treasuries A/A aa/aa aaa/aaa maturity Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 26.4 Typical Pattern (See Figure 26.1, page 611) Spread over Treasuries Maturity Baa/BBB A/A Aa/AA Aaa/AAA
26.5 The risk-free rate Most analysts use the LIBOR rate as the risk-free rate The excess of the value of a risk-free bond over a similar corporate bond equals the present value of the cost of defaults Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 26.5 The Risk-Free Rate • Most analysts use the LIBOR rate as the risk-free rate • The excess of the value of a risk-free bond over a similar corporate bond equals the present value of the cost of defaults