Pricing credit risk through equity options calibration

Emerald - 2006
MarcoFabio Delzio1
1Credit Suisse, Valuations Risk Group, London, UK

Tóm tắt

PurposeTo implement the model described in the companion paper, “Pricing credit risk through equity options calibration, part 1 – theory,” and show how to calculate the price of a set of coupon bonds issued by a US telecommunications and media company, AOL Time Warner, based on the information retrieved by the AOL equity derivatives market.Design/methodology/approachThe risk‐neutral density function of AOL Time Warner's stock is inferred from options volatilities; from there, the AOL assets risk neutral density function is calculated together with the default probabilities at different dates in the future. Finally, a set of AOL coupon bonds are priced accordingly and compared to market prices.FindingsThe AOL model‐theoretical prices are close to market prices, meaning that it is possible to perform relative‐value analysis in the risky bonds market based on the equity markets information.Originality/valueThe paper shows how easily the model can be used as a tool for performing relative‐value analysis between the equity options and the credit markets by using real market data.

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Tài liệu tham khảo

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