Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/22545
Authors: 
Sibbertsen, Philipp
Weißbach, Rafael
Year of Publication: 
2004
Series/Report no.: 
Technical Report / Universität Dortmund, SFB 475 Komplexitätsreduktion in Multivariaten Datenstrukturen 2004,33
Abstract: 
When calculating the cost of entering into a credit transaction the predominant stochastic component is the expected loss. Often in the credit business the one-year probability of default of the liable counterpart is the only reliable parameter. We use this probability to calculating the exact expected loss of trades with multiple cash ows. Assuming a constant hazard rate for the default time of the liable counterpart we show that the methodology used in practice is a linear Taylor approximation of our exact calculus. In a second stage we can generalize the calculation to arbitrary hazard rates for which we prove statistical evidence and develop an estimate from historical data.
Document Type: 
Working Paper

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