During the last decade, certificates have exhibited a remarkable success story on the German retail investment market. However, the Financial Market Crisis, especially the bankruptcy of Lehman Brothers, revealed one major characteristic of certificates which had been broadly disregarded before: From a legal point of view, certificates are bonds, and their prices should, thus, be affected by the creditworthiness of the issuer. We give an overview on the German certificates market and show that prices are usually not adjusted by the issuer risk. To incorporate the default risk of the issuer into the pricing of certificates, we follow Giitz et al., who use the CreditGrades framework with deterministic default barriers and volatility for valuation, and extend their approach by assuming stochasticity of the covariance of the underlying assets. Stochastic volatility is a very popular concept to explain effects like the option smile. Since certificates are composed of various building blocks such as call and digital call options, incorporating stochastic volatility into the valuation of certificates is straightforward. Concluding, we analyze the influence of stochastic volatility and debt parameters on the prices of certificates in our framework.      «

During the last decade, certificates have exhibited a remarkable success story on the German retail investment market. However, the Financial Market Crisis, especially the bankruptcy of Lehman Brothers, revealed one major characteristic of certificates which had been broadly disregarded before: From a legal point of view, certificates are bonds, and their prices should, thus, be affected by the creditworthiness of the issuer. We give an overview on the German certificates market and show that pr...     »