Pricing Model for Financial Guaranty Products Using Actuarial Methodology and Most Prudent Principle

Abstract

Considering the feasibility in China’s market and adopting existing pricing models on financial guaranty products and credit derivatives, a pricing model on financial guaranty products is built under the actuarial methodology. In the model, the geometric Brownian motion with correlation is chosen as the default process, the most prudent principle is applied to the calibration of the model and the Beta distribution is proposed to approximate the loss given default (LGD).