Abstract
This paper mainly studies the pricing of credit default swap with the loan as the reference asset under the primary-secondary model. In the contract of credit default swap (CDS), we consider that the defaults of the counterparties are correlated with the stochastic interest rate following Vasicek model or the default state of the reference firm. We assume that the company’s default is independent with the company’s prepayment and obtain the pricing formulas of the loan and loan CDS.
Highlights
Since the end of the twentieth century, the derivatives market has developed rapidly and become one of the most important financial innovations in the internationally financial market
We will make use of the contagious model with attenuation effect to study the pricing of Credit default swap (CDS) based on fully amortizing fixed-rate mortgage (FRM)
Default contagion is a common phenomenon in financial markets
Summary
Since the end of the twentieth century, the derivatives market has developed rapidly and become one of the most important financial innovations in the internationally financial market. Credit default swap (CDS) is one of the most important derivatives to manage credit risk in the financial market. (2016) Pricing Loan CDS with Vasicek Interest Rate under the Contagious Model. The research on credit default swap based on the loan in foreign countries mostly used the reduced method such as [14] [15]. [16] discussed the pricing problem of loan CDS with contagious risk. We will make use of the contagious model with attenuation effect to study the pricing of CDS based on fully amortizing fixed-rate mortgage (FRM). This kind of the loan is very common.
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