Pricing Certificates under Issuer Risk

Certificates have become very popular in Germany, Austria, and Switzerland in the last few years. From a technical and legal point of view they are bonds. Thus, their value actually also depends on the rating and creditworthiness of the issuing company. This aspect is in general neglected in the pricing of these products. In the following, we present a model which overcomes this lack and incorporates the default risk of the issuing company in the pricing.We derive closed-form expressions for index, basket, and bonus certificates under issuer risk in a BlackÐScholes model framework. The results are analyzed for different scenarios and compared with valuations in a model which neglects issuer risk.     «

Certificates have become very popular in Germany, Austria, and Switzerland in the last few years. From a technical and legal point of view they are bonds. Thus, their value actually also depends on the rating and creditworthiness of the issuing company. This aspect is in general neglected in the pricing of these products. In the following, we present a model which overcomes this lack and incorporates the default risk of the issuing company in the pricing.We derive closed-form expressions for ind...     »