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Valuation And Hedging Of Cds Counterparty Exposure In A Markov Copula Model

  • T. R. BIELECKI

    ()

    (Department of Applied Mathematics, Illinois Institute of Technology, 10 W 32nd Street, Chicago, IL 60616, USA)

  • S. CRÉPEY

    (Université d'Evry, Laboratoire d'Analyse & Probabilitiés, 23 Boulevard de France, 91037 Evry, France)

  • M. JEANBLANC

    (Université d'Evry, Laboratoire d'Analyse & Probabilitiés, 23 Boulevard de France, 91037 Evry, France)

  • B. ZARGARI

    (Université d'Evry, Laboratoire d'Analyse & Probabilitiés, 23 Boulevard de France, 91037 Evry, France; Sharif University of Technology, Iran)

Registered author(s):

    A 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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    Article 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 ()
    Pages: 1250004-1-1250004-39

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    Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:01:p:1250004-1-1250004-39
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