Valuation And Hedging Of Cds Counterparty Exposure In A Markov Copula Model
AbstractA Markov model is constructed for studying the counterparty risk in a CDS contract. The "wrong-way risk" in this model is accounted for by the possibility of the common default of the reference name and of the counterparty. A dynamic copula property as well as affine model specifications make pricing and calibration very efficient. We also consider the issue of dynamically hedging the CVA with a rolling CDS written on the counterparty. Numerical results are presented to show the adequacy of the behavior of CVA in the model with stylized features.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 15 (2012)
Issue (Month): 01 ()
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Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
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- Cyril Durand & Marek Rutkowski, 2013. "CVA for Bilateral Counterparty Risk under Alternative Settlement Conventions," Papers 1307.6486, arXiv.org.
- Lijun Bo & Agostino Capponi, 2013. "Bilateral Credit Valuation Adjustment for Large Credit Derivatives Portfolios," Papers 1305.5575, arXiv.org.
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