Abstract
The Loan CDS (LCDS) contract is in some aspects similar to a standard unsecured CDS contract, except for two main features. First, the underlying reference obligation for LCDS is secured loan. Second, the LCDS contract is canceled if there is no reference obligation available, whereas a CDS contract remains outstanding until event of a default. In this paper we first introduce a structural approach for pricing the LCDS as an extension of the corporate CDS. We then develop a general intensity based model for the pricing and trading of LCDS contract. Solutions to which can be obtained under Affine Jump Diffusion specifications through a set of Riccati equations and explicit formula are derived under the CIR parameterization. Finally, we generalize the results for pricing the LCDX tranche products and extend the single factor Gaussian copula model to take into account the cancellation risk.
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