& CDO Prices and Risk Management: A Comparative Study of Alternative Approaches for iTraxx Pricing

References ........................................................................................................525

25.1 INTRODUCTION Default risk is now spreading the valuation of derivatives in any area. Whenever a derivative is traded over the counter, the default risk of the counterparty should, in principle, enter the valuation. Recently, regulatory institutions have insisted on the need to include this kind of risk in the pricing paradigm, as for example pointed out in the Basel II framework and also in the IAS 39 system.