Applications of Distorted Copula Functions to Valuation of BDS and Its Sensitivity Analysis
Yue Wang · Journal of systems management · 2010
In this paper,by using Monte Carlo simulation,we found that it is better to use distorted Copula functions to characterize the tail dependence than that of standard Gaussian Copula functions;By using distorted copula functions to price BDS and carrying out the sensitivity analysis of discounted payoff function with respect to the hazard rate function with perturbation,we investigated the default risk and hedging strategy of the BDS.The results showed that the distorted copula functions could be served as one effective tool for pricing BDS and risk hedging.