Valuation of a Default Swap Option___________.PDF
نویسنده
چکیده
This paper makes an analysis on a default swap option that an investment bank in Japan produced on the credit-risk of a convertible bond issued by a third company C. In this default swap option, a protection buyer A against a default of C owns the right of starting an interest swap between the buyer and a protection seller B when a credit event happens. When B starts the swap after a default, the floating rate is associated with the protection premium. After a certain simplification, this paper gives a no-arbitrage valuation formula for the premium in a discrete time approach. In addition, when the credit quality of the parties A and B is taken into account in the valuation, a fair value of the default swap option is also derived.
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