This thesis presents an appropriate model for pricing a CBO (Collateralized Bond Obligation), a credit correlation product, in Korea. In determining the fair value of CBO, evaluating the default correlations is an important task. This model, which simulates correlation risk based on Zhou(2001)’s first passage time model, focuses on the two aspects. The first investigates how much the price of CBO is affected by default correlation. The second discusses the method that estimates the two unobservable parameters, the firm value and the volatility of firm value return based on a Black and Cox(1976)’s traditional first passage time model and the characteristics of default probability obtained from this model.
As a result, the default probability of Black and Cox model was found to be higher than that of KMV model. The model price of CBO that took default correlation into consideration was found to be lower than that not having taken into consideration. It was also found to be significantly lower than the actually issued price.
