Credit Default Swap Valuation with Counterparty Risk ∗
نویسندگان
چکیده
Using the reduced form framework with inter-dependent default correlation, we perform valuation of credit default swap with counterparty risk. The inter-dependent default risk structure between the protection buyer, protection seller and the reference entity in a credit default swap are characterized by their correlated default intensities, where the default intensity of one party increases when the default of another party occurs. We explore how settlement risk and replacement cost affect the swap rate in credit default swaps.
منابع مشابه
Counterparty Risk Valuation for Cds
The valuation of counterparty risk for single name credit derivatives requires the computation of joint distributions of default times of two default-prone entities. For a Merton-type model, we derive some formulas for these joint distributions. As an application, closed formulas for coun-terparty risk on a CDS or for a first-to-default swap on two underlyings are obtained.
متن کاملCredit Valuation Adjustment
Credit risk has become a topical issue since the 2007 Credit Crisis, particularly for its impact on the valuation of OTC derivatives. This becomes critical when the credit risk of entities involved in a contract either as underlying or counterparty become highly correlated as is the case during macroeconomic shocks. It impacts the valuation of such contracts through an additional term, the cred...
متن کاملCredit Default Swap Calibration and Counterparty Risk Valuation with a Scenario based First Passage Model ∗
In this work we develop a tractable structural model with analytical default probabilities depending on a random default barrier and possibly random volatility ideally associated with a scenario based underlying firm debt. We show how to calibrate this model using a chosen number of reference Credit Default Swap (CDS) market quotes. In general this model can be seen as a possible extension of t...
متن کاملCredit Default Swap Calibration and Equity Swap Valuation under Counterparty Risk with a Tractable Structural Model
In this paper we develop a tractable structural model with analytical default probabilities depending on some dynamics parameters, and we show how to calibrate the model using a chosen number of Credit Default Swap (CDS) market quotes. We essentially show how to use structural models with a calibration capability that is typical of the much more tractable credit-spread based intensity models. W...
متن کاملCredit Risky Securities Valuation under a Contagion Model with Interacting Intensities
We study a three-firm contagion model with counterparty risk and apply this model to price defaultable bonds and credit default swap CDS . This model assumes that default intensities are driven by external common factors as well as other defaults in the system. Using the “total hazard” approach, default times can be generated and the joint density function is obtained. We represent the pricing ...
متن کامل