The market for credit default swaps (CDS) has experienced explosive growth in the past. Credit default swaps have existed since the early 1990s and the market increased tremendously starting in 2003. By the end of 2007, the outstanding amount was $62.2 trillion, falling to $38.6 trillion by the end of 2008. The recent crisis has revealed several shortcomings in CDS market practices and structur...

In this work we derive an approximated no-arbitrage market valuation formula for Constant Maturity Credit Default Swaps (CMCDS). We move from the CDS options market model in Brigo (2004), and derive a formula for CMCDS that is the analogous of the formula for constant maturity swaps in the default free swap market under the LIBOR market model. A “convexity adjustment”-like correction is present...

In this paper, under the reduced form framework and “Bottom Up” method, a model for pricing a basket Loan-only Credit Default Swap (LCDS), with the negative correlation between prepayment and default, is established. A general pricing formula for it is obtained, where one factor CIR (Cox-Ingersoll-Ross) and ICIR (Inversed CIR) models are used to describe the negative correlation between prepaym...

Because the contractual features of defaultable securities are usually complex and it may be difficult to find comparable securities for which to observe prices, valuation based on simple rules of thumb is often infea-sible. For example, one may have to value an interest rate swap subject to termination if one of the parties has its credit downgraded, and there are no comparable swaps that one ...

A local volatility model is enhanced by the possibility of a single jump to default. The jump has a hazard rate that is the product of the stock price raised to a prespecified negative power and a deterministic function of time. The empirical work uses a power of −1.5. It is shown how one may simultaneously recover from the prices of credit default swap contracts and equity option prices both t...

We study the pricing of defaultable derivatives, such as bonds, bond options, and credit default swaps in the reduced form framework of intensity-based models. We use regular and singular perturbation expansions on the intensity of default from which we derive approximations for the pricing functions of these derivatives. In particular, we assume an Ornstein-Uhlenbeck process for the interest r...