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Implementing a Structural Valuation Model of Swap Credit-Sensitive Rates

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  • Hugues Pirotte

Abstract

Currency and interest rate swaps are subject to a complex, two-sided default risk. Several theoretical papers have addressed the problem of pricing swap credit risk. I propose a complete implementation procedure of the structural line of research in theoretical credit risk analysis in order to attempt to evaluate an OTC contract such as the swap contract. It is shown how structural models can enable us to extract the whole credit risk information from scarce data if of good quality, which leads to the problem of mixing accounting and available financial data from traded prices. Ther analytical results are therefore benchmarked against actual transaction data. Although the results are not very satisfactory for swap pricing, the procedure provides interesting insights in some parameter estimations linked to the credit worthiness of the firm that show to be consistent indicators, useful for credit risk management purposes.

Suggested Citation

  • Hugues Pirotte, 1999. "Implementing a Structural Valuation Model of Swap Credit-Sensitive Rates," Working Papers CEB 99-001.RS, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:99-001
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    References listed on IDEAS

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    1. Campbell, John Y, 1986. "A Defense of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 41(1), pages 183-193, March.
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    3. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
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    5. Cossin, Didier & Pirotte, Hugues, 1997. "Swap credit risk: An empirical investigation on transaction data," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1351-1373, October.
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    More about this item

    Keywords

    derivatives; swaps; credit risk; transaction data; model calibration.;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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