DefaultRisk.com the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search
pp_crdrv_24

Up

Submit Your Paper

In Rememberance: World Trade Center (WTC)

Export citation to:
- HTML
- Text (plain)
- BibTeX
- RIS
- ReDIF

Valuation of Credit Default Swaps and Swaptions

by Farshid Jamshidian of NIB Capital Bank

October 12, 2002

Abstract: This paper presents a conceptual framework for valuation of single-name credit derivatives, and recuperates, in some cases generalizing, a few of known results in credit risk theory. Valuation is viewed with respect to a given state price density and relative to a general numeraire. Default probabilities and recoveries are considered as processes adapted to a subfiltration, following Jeanblanc and Rutosksy [JR], or, in the special case of Cox processes, Lando [L]. A result of Duffie and Singleton [DS] on pricing bonds with recovery in terms of loss ratio is reproduced. The notion of coadapted change of numeraire is introduced, and its invariants identified and studied. The concept of a credit claim is formalized by introducing notions of T-claims, τ -claims, and Τ eams. Application is made to credit default swaps and swaption, and a known Black-Scholes approximation for the latter is derived.

JEL Classification: E43, G13.

AMS Classification: 91B28, 60G44, 60G40.

Keywords: Credit default swap, swaption, swap rate, subfiltration, conditional survival probability, preprice, prenumeraire, recovery, coadapted numeraires.

Published in: Finance and Stochastics, Vol. 8, No. 3, (August 2004), pp. 343-371.

Previously titled: "Valuation of Credit Default Swap and Swaptions"

Books Referenced in this paper:  (what is this?)

Download paper (287K PDF) 26 pages