The Pricing and Risk Management of Credit Default Swaps, with a Focus on the ISDA Model
نویسنده
چکیده
In the paper we detail the reduced form or hazard rate method of pricing credit default swaps, which is a market standard. We then show exactly how the ISDA standard CDS model works, and how it can be independently implemented. Particular attention is paid to the accrual on default formula: We show that the original formula in the standard model is slightly wrong, but more importantly the proposed fix by Markit is also incorrect and gives a larger error than the original formula. We finish by discussing the common risk factors used by CDS traders, and how these numbers can be calculated analytically from the ISDA model.
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