Credit Spread in Trees

[andrea.odetti-2]

Hi,

I'm thinking about the way to introduce a spread (like credit spread) in
the evaluation of interest rate derivatives

let's say I would like to price a Fixed Coupon Bond rated BBB...
let's say that BBB has a credit spread of 120bp

I just push up my term structure of 120bp and price my fixed coupon bond as
usual.

but for a floater I would need 2 different term structures, one for
discounting (spreaded) and one to compute forward rates (without spread).

maybe the same could work for evaluating derivatives.

In the Hull&White tree we could use the standard curve to bild nodes and
the spreaded one just to rollback in the tree.

May be I'm wrong...

any idea?

ciao

andrea

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[Luigi Ballabio-2]

At 10:42 AM 4/15/03 +0200, [hidden email] wrote:
>I'm thinking about the way to introduce a spread (like credit spread) in
>the evaluation of interest rate derivatives
>
>but for a floater I would need 2 different term structures, one for
>discounting (spreaded) and one to compute forward rates (without spread).

Andrea,
         if you check out the latest version from CVS, you can use Nicolas'
IndexedCoupon for the task, namely:
1) instantiate a Libor object by passing it the curve without spread;
2) instantiate the coupons (in this case, UpFrontIndexedCoupon) by passing
    them the libor you created;
3) discount the coupon values returned by CashFlow::amount by using the
    spreaded term structure.

Also, you're welcome to perform:
4) wrap the above in a Bond class and contribute it to the library :)

Bye,
         Luigi