Pricing Credit Derivatives in Credit Classes Frameworks

Many credit management systems, based on different underlying frameworks, are now available to measure and control default and credit risks1. Homogeneous credit classes and associated transition matrix may thus be constructed within many different frameworks. For illustration, the KMV Corporation provides a transition matrix within a structural approach à la Black-Sholes-Merton (Crouhy-Galai-Mark [5]). Independentely from the underlying framework, a methodology based on credit classes may therefore be used to price any claim contingent on credit events among which the default.