2
votes
1answer
84 views

Introducing credit risk to an already implemented interest rate model

Do any standard/generic approaches exist on how to extend an interest rate model to incorporate credit risk? The first thing that comes to mind would be to just model the credit spread separately - ...
2
votes
0answers
330 views

What is an appropriate hedge ratio for hedging a credit instrument with equity of the same issuer?

Given a bond and a stock issued by the same issuer, what is the appropriate ratio of bond-to-stock one should hold in order to minimize the specific risk to that issuer? Equivalently, what is the ...
8
votes
1answer
2k views

How to estimate probability of default from bond prices?

How do you use bond prices/yields to infer probabilities of default? I would think of it as follows: Create a relationship between default free (e.g., Germany) and defaultable (e.g., Greece) bond ...