This presentation shows how to take the guesswork out of what credit margin to use when valuing credit-risky derivatives. It also sheds light on how 'relative value trading' and 'capital structure arbitrage' may be analysed quantitatively. We build a model from basics and show the results of its application to France Telecom, a company with a very complex capital structure, and also apply it to a traditionally difficult area of valuation, that of convertible bonds. The analysis extends Merton's firm value model in several directions.

Presentation

• The paper Cross-market vaulation by Doug Moss appeared in the April 2004 issue of www.risk.net.

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