Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization
Computational Finance
2018-03-22 v1 Pricing of Securities
Risk Management
Abstract
This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.
Cite
@article{arxiv.1803.07843,
title = {Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization},
author = {Alan White},
journal= {arXiv preprint arXiv:1803.07843},
year = {2018}
}