The impact of credit quality on swap rates is determined under alternative netting assumptions. With counterparties of different default risk, swap valuation is non-linear in the underlying promised exchange of cash flows. The impact of credit risk asymmetry and of netting is presented through both theory and numerical examples, which include interest rate and currency swaps.

Abstract This paper considers the valuation problem of basket CDSs. Based on the construction of total hazard rates, the paper develops the work of Zheng and Jiang [17] from the homogenous case to the primary-subsidiary heterogenous case in the interacting intensity framework, and obtains the corresponding joint density of the default time. Moreover, the paper derives the valuation formulae for...

Banks use over-the-counter derivative (OTCD) contracts for sharing the risks of their asset streams. OTCDs are composed of an optimal combination of interbank loans, asset swaps and credit default swaps (CDS). The settlement of ex-post realized claims are renegotiated by participating banks after defaults by one or more banks to minimize the systemic impact of the default. The bailout by a solv...

Credit default swaps (CDS) are the most common type of credit derivatives used for hedging and speculative purposes in markets. We consider a representative risk-averse investor who has initial endowment instrument invests traditional financial instruments. Using utility indifference pricing approach, we construct framework single-name CDS contracts with periodic payments multi-period model. Mo...

We consider a firm-value model similar to the one proposed by Black and Cox (1976) where additionally the firm value is allowed to jump and instead of assuming a constant and known default boundary, the default boundary is a random and unobserved process. This process has a Brownian component, reflecting the influence of uncertain effects on the precise timing of the default, and a jump compone...

We study financial networks and reveal a new kind of systemic risk arising from what we call default ambiguity, i.e., a situation where it is impossible to decide which banks are in default. Specifically, we study the clearing problem: given a network of banks interconnected by financial contracts, determine which banks are in default and what percentage of their liabilities they can pay. Prior...