Pricing and Hedging of Portfolio Credit Derivatives with Interacting Default Intensities

We consider reduced-form models for portfolio credit risk with interacting default intensities.
In this class of models default intensities are modelled as functions of time and
of the default state of the entire portfolio, so that phenomena such as default contagion or
counterparty risk can be modelled explicitly. In the present paper this class of models is
analyzed by Markov process techniques. We study in detail the pricing and the hedging
of portfolio-related credit derivatives such as basket default swaps and collaterized debt
obligations (CDOs) and discuss the calibration to market data.