Pricing European Style Credit Spread Option

Abstract:

Besides the risk of interest rate,investors may also suffer economic losses due to an enterprise’s bankruptcy and illmanagement,therefore,the credit default swap and credit spread option are put forward for the sake of the investers.Based on the first passage model and PDE,the closedform solution is obtained with the credit spread option as the compound option of the firm value and the short interest rate with barrier.The financial meanings are analyzed by numerical results.

Key words:corporate bond; credit spread option; first passage time model