3.1 Introduction

Let us begin with a short introduction to the credit risk market. Credit derivatives are financial products that bring to their owner, under some prespecified conditions, a payment protection when default events occur. A default event can be a number of events, including the bankruptcy of a financial entity or its inability to reimburse its debt. In general, we divide these derivatives into two categories. The first category consists in the single-name credit derivatives that are products that deal with only one default. The most widespread product that belongs to that category is the credit default swap (CDS). Let us describe here briefly its mechanism. The owner of a CDS will receive a protection payment when a firm defaults, if this hap....