Abstract
The valuation of credit derivatives has for a long time been based on the assumption of default free counterparties. However, credit derivatives are not traded at an exchange and less than half of the OTC market participants are rated “A” or above. Hence, the consideration of counterparty risk is essential for a correct and consistent valuation of credit derivatives. Given this fact, the paper discusses the valuation of credit default swaps with defaultable counterparties. We address valuation based on observable market data (Hull and White 2000, 2001), Merton´s structural approach, a two-state-intensity model according to Jarrow and Yu (2001) and a rating-based approach following Lando (2000).
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.