Arbitrage-Free Price Ranges for nth-to-Default Swaps
نویسنده
چکیده
The arbitrage-free range of values of the loss leg of an nth-to-default swap, and the arbitrage-free range of premium payments for such a swap, are derived for homogeneous baskets of arbitrary numbers of reference entities. Elementary arbitrage arguments are given which show that arbitrage opportunities exist if the prices lie outside of the bounds, and analyses of both a discrete-time model and a continuous-time model show that all prices within the bounds are arbitrage-free. 1Department of Physics, University of Toronto, Toronto, ON M5S 1A7, CANADA; email: [email protected]; telephone: (416) 978-3821 2The support of the Natural Sciences and Engineering Research Council of Canada is acknowledged
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