Pricing Credit Default Swaps with the Intersection of Bilateral Counterparty, Reference and Market Risks

• Main Authors: Yan-Ling Chen, 陳彥伶
• Other Authors: Chou-Wen Wang
• Format: Others
• Language: zh-TW
• Published: 2005
• Online Access: http://ndltd.ncl.edu.tw/handle/68940254935959203672

碩士 === 國立高雄第一科技大學 === 財務管理所 === 93 === In this paper, we extend the model setup of Jarrow and Yu (2001), Jarrow and Turnbull (2000), Kusuoka (1999) to derive the credit default swaps with the intersection of bilateral counterparties, reference and market risks. We first derive the pricing formulas for zero coupon bonds of reference entity, protection buyers, and protection sellers respectively. We also derive the suitable swap rate of credit default swap. From the section of numerical analyses, we compare our models with the model of Jarrow and Yu (2001) and find that (1) the assumption of “idealized default swap” underprices the swap rates of the credit default swaps. (2) the swap rates are underestimated without considering the default risk of protection buyer. Furthermore, we also demonstrate that the swap rates are underestimated without considering the default correlation between protection buyer (seller) and reference obligation. Meanwhile, without the consideration of the intersection of market and credit risks, the swap rates maybe be overpriced or underpriced.