@article {Hui54, author = {Cho Hoi. Hui}, title = {Modeling Forward Credit Risk {\textemdash} An Option Approach}, volume = {9}, number = {2}, pages = {54--61}, year = {1999}, doi = {10.3905/jfi.1999.319260}, publisher = {Institutional Investor Journals Umbrella}, abstract = {A new Capital Accord recently proposed by the Basle Committee on banking supervision raises the question of how to measure forward credit risk capital charges arising from maturity{\textendash}mismatched hedges. This article develops a model to measure forward credit risk that is treated as a put option on a firm{\textquoteright}s asset value with a maturity{\textendash}mismatched hedge. The hedge is considered a knockout barrier covering part of the put option life. When the firm value breaches the barrier, this triggers the guarantor to provide full protection to the lender. A closed-form formula of this barrier put option is derived and used to calculate forward credit risk premiums. A straight-line method with a premium capital charge and minimum one-year hedge period for treating residual credit risk in maturity mismatches is shown to be conservative and appropriate for the proposed Capital Accord.}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/9/2/54}, eprint = {https://jfi.pm-research.com/content/9/2/54.full.pdf}, journal = {The Journal of Fixed Income} }