Abstract

In this paper, we have developed a pricing model for credit spread options with the existence of the counterparty default risk. The default dependence is modeled in the interacting intensities framework, and the correlation between default and the interest rate is considered. Semi-analytic pricing formulas for European credit spread put options with counterparty risk are derived. The numerical analysis shows that the counterparty default risk has a considerable influence on the value of a credit spread option.

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