Exercise 16.9 In the reduced-form approach, suppose that the default-free spot rates r(t) follow the Vasicek model

and that the hazard-rate process {h(t)} follows another Vasicek model

with dzrdzh = ρdt. Obtain the time-t price of the debt for each recovery formulation.

Transcribed Image Text:

= dar(mr)dt+,dzr, 0