Pricing credit default swaps with bilateral value adjustments

2012/07/25 by Alexander Lipton, Lipton, Alexander, Ioana Savescu +1
Economics, Econometrics and Finance · #FOS: Economics and business #Pricing of Securities (q-fin.PR) #q-fin.PR

paper · pdf · doi:10.48550/arxiv.1207.6049

49 pages, 31 figures. arXiv admin note: substantial text overlap with arXiv:1206.3104

arxiv created 2012/07/25 · arxiv updated 2012/07/26

Abstract

A three-dimensional extension of the structural default model with firms' values driven by correlated diffusion processes is presented. Green's function based semi-analytical methods for solving the forward calibration problem and backward pricing problem are developed. These methods are used to analyze bilateral counterparty risk for credit default swaps and evaluate the corresponding credit and debt value adjustments. It is shown that in many realistic cases these value adjustments can be surprisingly large.

Citations

• A structural approach to pricing credit default swaps with credit and debt value adjustments

Related

• A structural approach to pricing credit default swaps with credit and debt value adjustments
• Bilateral counterparty risk valuation with stochastic dynamical models and application to Credit Default Swaps
• Bilateral Credit Valuation Adjustment for Large Credit Derivatives Portfolios
• Credit Default Swap Calibration and Equity Swap Valuation under Counterparty Risk with a Tractable Structural Model
• Pricing Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment