IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v16y2013i07ns0219024913500404.html
   My bibliography  Save this article

Bilateral Counterparty Risk Valuation Of Cds Contracts With Simultaneous Defaults

Author

Listed:
  • LONG TENG

    (Lehrstuhl für Angewandte Mathematik und Numerische Analysis, Fachbereich C — Mathematik und Naturwissenschaften, Bergische Universität Wuppertal, Gaußstr. 20, 42119 Wuppertal, Germany)

  • MATTHIAS EHRHARDT

    (Lehrstuhl für Angewandte Mathematik und Numerische Analysis, Fachbereich C — Mathematik und Naturwissenschaften, Bergische Universität Wuppertal, Gaußstr. 20, 42119 Wuppertal, Germany)

  • MICHAEL GÜNTHER

    (Lehrstuhl für Angewandte Mathematik und Numerische Analysis, Fachbereich C — Mathematik und Naturwissenschaften, Bergische Universität Wuppertal, Gaußstr. 20, 42119 Wuppertal, Germany)

Abstract

We analyze the general risk-neutral valuation for counterparty risk embedded in a Credit Default Swap (CDS) contract by adapting the recent findings of Brigo and Capponi (2009) to allow for simultaneous defaults among the two parties and the underlying reference credit, while the counterparty risk is considered bilaterally. For the default intensities, we employ a Markov copula model allowing for the possibility of a simultaneous default. The dependence between defaults of three names in a CDS contract and the wrong-way risk will thus be represented by the possibility of simultaneous defaults.We investigate numerically the effect of considering simultaneous defaults on the counterparty risk valuation of a CDS contract. Finally, we study a CDS contract between Royal Dutch Shell and British Airways based on Lehman Brothers applying this methodology, illustrating the bilateral adjustments with the possibility of simultaneous defaults in concrete crisis situations.

Suggested Citation

  • Long Teng & Matthias Ehrhardt & Michael Günther, 2013. "Bilateral Counterparty Risk Valuation Of Cds Contracts With Simultaneous Defaults," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(07), pages 1-20.
    • Handle: RePEc:wsi:ijtafx:v:16:y:2013:i:07:n:s0219024913500404
    DOI: 10.1142/S0219024913500404
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024913500404
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024913500404?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Damiano Brigo & Agostino Capponi, 2008. "Bilateral counterparty risk valuation with stochastic dynamical models and application to Credit Default Swaps," Papers 0812.3705, arXiv.org, revised Nov 2009.
    2. Tomasz R. Bielecki & Igor Cialenco & Ismail Iyigunler, 2011. "Counterparty Risk and the Impact of Collateralization in CDS Contracts," Papers 1104.2625, arXiv.org, revised Aug 2011.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cetina, Jill & Paddrik, Mark & Rajan, Sriram, 2018. "Stressed to the core: Counterparty concentrations and systemic losses in CDS markets," Journal of Financial Stability, Elsevier, vol. 35(C), pages 38-52.
    2. Simonella, Roberta & Vázquez, Carlos, 2023. "XVA in a multi-currency setting with stochastic foreign exchange rates," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 207(C), pages 59-79.
    3. Enrico Biffis & David Blake & Lorenzo Pitotti & Ariel Sun, 2016. "The Cost of Counterparty Risk and Collateralization in Longevity Swaps," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(2), pages 387-419, June.
    4. Arregui, Iñigo & Salvador, Beatriz & Vázquez, Carlos, 2017. "PDE models and numerical methods for total value adjustment in European and American options with counterparty risk," Applied Mathematics and Computation, Elsevier, vol. 308(C), pages 31-53.
    5. Chuang Yi, 2011. "Dangerous Knowledge: Credit Value Adjustment With Credit Triggers," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(06), pages 839-865.
    6. Harvey J. Stein, 2016. "Fixing Risk Neutral Risk Measures," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-28, May.
    7. Damiano Brigo & Cristin Buescu & Massimo Morini, 2011. "Impact of the first to default time on Bilateral CVA," Papers 1106.3496, arXiv.org.
    8. Mai Jan-Frederik & Scherer Matthias, 2013. "What makes dependence modeling challenging? Pitfalls and ways to circumvent them," Statistics & Risk Modeling, De Gruyter, vol. 30(4), pages 287-306, December.
    9. Azusa Takeyama & Nick Constantinou & Dmitri Vinogradov, 2012. "Credit Risk Contagion and the Global Financial Crisis," IMES Discussion Paper Series 12-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
    10. Tomasz R. Bielecki & Igor Cialenco & Ismail Iyigunler, 2012. "Collateralized CVA Valuation with Rating Triggers and Credit Migrations," Papers 1205.6542, arXiv.org.
    11. Bäuerle Nicole & Schmock Uwe, 2012. "Dependence properties of dynamic credit risk models," Statistics & Risk Modeling, De Gruyter, vol. 29(3), pages 243-268, August.
    12. Guglielmo D'Amico & Raimondo Manca & Giovanni Salvi, 2011. "Bivariate Semi-Markov Process for Counterparty Credit Risk," Papers 1112.0226, arXiv.org, revised Oct 2012.
    13. Damiano Brigo & Mirela Predescu & Agostino Capponi, 2010. "Credit Default Swaps Liquidity modeling: A survey," Papers 1003.0889, arXiv.org, revised Mar 2010.
    14. Damiano Brigo, 2011. "Counterparty Risk FAQ: Credit VaR, PFE, CVA, DVA, Closeout, Netting, Collateral, Re-hypothecation, WWR, Basel, Funding, CCDS and Margin Lending," Papers 1111.1331, arXiv.org, revised Jun 2012.
    15. Damiano Brigo & Massimo Morini & Marco Tarenghi, 2009. "Credit Calibration with Structural Models: The Lehman case and Equity Swaps under Counterparty Risk," Papers 0912.4404, arXiv.org.
    16. Damiano Brigo & Andrea Pallavicini & Vasileios Papatheodorou, 2009. "Bilateral counterparty risk valuation for interest-rate products: impact of volatilities and correlations," Papers 0911.3331, arXiv.org, revised Feb 2010.
    17. van der Zwaard, Thomas & Grzelak, Lech A. & Oosterlee, Cornelis W., 2021. "A computational approach to hedging Credit Valuation Adjustment in a jump-diffusion setting," Applied Mathematics and Computation, Elsevier, vol. 391(C).
    18. Jean-Paul Laurent & Philippe Amzelek & Joe Bonnaud, 2014. "An overview of the valuation of collateralized derivative contracts," Review of Derivatives Research, Springer, vol. 17(3), pages 261-286, October.
    19. Dilip B. Madan, 2012. "From credit valuation adjustments to credit capital commitments," Quantitative Finance, Taylor & Francis Journals, vol. 12(6), pages 839-845, April.
    20. Giovanni Mottola, 2014. "A stochastic switching control model arising in general OTC contracts with contingent CSA in presence of CVA, collateral and funding," Papers 1412.1469, arXiv.org.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:16:y:2013:i:07:n:s0219024913500404. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.