Valuation and Hedging of CDS Counterparty Exposure in a Markov Copula Model
نویسندگان
چکیده
A Markov model is constructed for studying the counterparty risk in a CDS contract. The ‘wrong-way risk’ in this model is accounted for by the possibility of the common default of the reference name and of the counterparty. A dynamic copula property as well as affine model specifications make pricing and calibration very efficient. We also consider the issue of dynamically hedging the CVA with a rolling CDS written on the counterparty. Numerical results are presented to show the adequacy of the behavior of CVA in the model with stylized features.
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