The aim of this work is the implementation of pricing engine for Nth to default credit swaps. The pricing model we consider is the ”Li model” [Li, 2000]; our implementation is based on the techniques described in [Joshi and Kainth, 2004]. The model described in [Li, 2000] uses Gaussian Copulae to model asset correlation. It is well-known that Gaussian Copulas do not model satisfactorily tail de...

We use the term structure of spreads between rates on interest rate swaps indexed to LIBOR and overnight indexed swaps to infer a term structure of interbank risk. We develop a dynamic term structure model with default risk in the interbank market that, in conjunction with information from the credit default swap market, allows us to decompose the term structure of interbank risk into default a...

We consider the optimal portfolio problem of a power investor who wishes to allocate her wealth between several credit default swaps (CDSs), a stock index, and a money market account. We model contagion risk among the reference entities in the portfolio using a reduced form Markovian model with interacting default intensities. Using the dynamic programming principle, we establish a lattice depe...

This paper studies the problem of default correlation. We first introduce a random variable called “timeuntil-default” to denote the survival time of each defaultable entity or financial instrument, and define the default correlation between two credit risks as the correlation coefficient between their survival times. Then we argue why a copula function approach should be used to specify the jo...

We consider counterparty risk for interest rate payoffs in presence of correlation between the default event and interest rates. The previous analysis of Brigo and Masetti (2006), assuming independence, is further extended to interest rate payoffs different from simple swap portfolios. A stochastic intensity model with possible jumps is adopted for the default event. We find that correlation be...

In our project we have used parametric simulation and filtered historical simulation by GARCH processes to model the future position on a portfolio of some actively trading S&P bonds and related credit default swaps. The portfolio is marked to market daily based on the daily prices and CDS spreads over a seven year period. The Credit default swaps are priced daily based on the shifts in the def...

We consider counterparty risk for Credit Default Swaps (CDS) in presence of correlation between default of the counterparty and default of the CDS reference credit. Our approach is innovative in that, besides default correlation, which was taken into account in earlier approaches, we also model credit spread volatility. Stochastic intensity models are adopted for the default events, and default...

Regulatory changes are transforming the multitrillion dollar swaps market from a network of bilateral contracts to one in which swaps are cleared through central counterparties (CCPs). The stability of the new framework depends on the CCPs’ resilience. Margin requirements are a CCP’s first line of defense against the default of a counterparty. To capture liquidity costs at default, margin requi...

This paper studies the problem of default correlation. We first introduce a random variable called “timeuntil-default” to denote the survival time of each defaultable entity or financial instrument, and define the default correlation between two credit risks as the correlation coefficient between their survival times. Then we argue why a copula function approach should be used to specify the jo...