Pricing credit default swaps with bilateral value adjustments
Pricing of Securities
2012-07-26 v1
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.
Cite
@article{arxiv.1207.6049,
title = {Pricing credit default swaps with bilateral value adjustments},
author = {Alexander Lipton and Ioana Savescu},
journal= {arXiv preprint arXiv:1207.6049},
year = {2012}
}
Comments
49 pages, 31 figures. arXiv admin note: substantial text overlap with arXiv:1206.3104