TY - JOUR T1 - Understanding the Default-Implied Volatility for Credit Spreads JF - The Journal of Derivatives SP - 67 LP - 77 DO - 10.3905/jod.2000.319135 VL - 7 IS - 4 AU - C.K. Zheng Y1 - 2000/05/31 UR - https://pm-research.com/content/7/4/67.abstract N2 - One useful way to model default risk in bonds is as a form of option within the contingent claims framework. Zheng shows how a defaultable bond can be thought of as a combination of a default-free bond and a short position in a certain kind of barrier option. In that case, it is possible to compute an implied volatility of the default spread from the (implied) price of that option. With such a volatility estimate, one can price credit derivatives using the market's implied credit spread volatility. Zheng illustrates the approach by computing an implied volatility curve and applying it to value a credit spread put and a first-to-default swap. ER -