Valuation of Loan Credit Default Swaps Correlated Prepayment and Default Risks with Stochastic Recovery Rate

Valuation of credit default swaps and swaptions

This paper presents a conceptual framework for valuation of single-name credit derivatives, and recuperates, in some cases generalizing, a few of known results in credit risk theory. Valuation is viewed with respect to a given state price density and relative to a general numeraire. Default probabilities and recoveries are considered as processes adapted to a subfiltration, following Jeanblanc ...

Laying off Credit Risk: Loan Sales versus Credit Default Swaps∗

After making a loan, a bank finds out if the loan needs contract enforcement (“monitoring”); it also decides whether to lay off credit risk in order to release costly capital. A bank can lay off credit risk by either selling the loan or by buying insurance through a credit default swap (CDS). With a CDS, the originating bank retains the loan’s control rights but no longer has an incentive to mo...

Bilateral counterparty risk valuation with stochastic dynamical models and application to Credit Default Swaps

We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including default of the investor. We illustrate the symmetry in the valuation and show that the adjustment involves a long position in a put option plus a short position in a call option, both with zero strike and written on the residual net value of the contract...

Modeling Basket Credit Default Swaps with Default Contagion

The specification of a realistic dependence structure is key to the pricing of multi-name credit derivatives. We value small k th-to-default CDS baskets in the presence of asset correlation and default contagion. Using a first-passage framework, firm values are modeled as correlated geometric Brownian motions with exponential default thresholds. Idiosyncratic links between companies are incorpo...

Valuation of Credit Default Swaptions and Credit Default Index Swaptions