Credit Risk Linking Return Deposit Pricing

Abstract:

To diversify credit risk,the so called deposit linking with credit risk is issued,whose return depends on whether a specified firm default before the maturity of the deposit.The first passage model is employed.A firm is believed to go bankrupcy when its assets are less than its debts.With stochastic interest rate,the closed form pricing formula is obtained with partial deffrential equation approach.Finally,the financial significance is discussed.

Key words:credit risk; default; deposit linking with credit risk; first passage model