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- difflab2000
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Pricing bond/loan options
Suppose I buy a corporate loan or bond at e.g. 75% of par in the market. I can hold the loan/bond until maturity and hope I will get the full face value (100) back or I could sell the upside (all above 75) to someone. How would I price an option that pays off MAX(0,RecoveryRate-75)? I'm interested in a simple approximative answer and would appreciate any leads to the right direction as I have very litte knowledge about credit derivatives.Thanks!