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Bilateral Defaultable Financial Derivatives Pricing and Credit Valuation Adjustment

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  • Xiao, Tim

Abstract

The one-side defaultable financial derivatives valuation problems have been studied extensively, but the valuation of bilateral derivatives with asymmetric credit qualities is still lacking convincing mechanism. This paper presents an analytical model for valuing derivatives subject to default by both counterparties. The default-free interest rates are modeled by the Market Models, while the default time is modeled by the reduced-form model as the first jump of a time-inhomogeneous Poisson process. All quantities modeled are market-observable. The closed-form solution gives us a better understanding of the impact of the credit asymmetry on swap value, credit value adjustment, swap rate and swap spread.

Suggested Citation

  • Xiao, Tim, 2018. "Bilateral Defaultable Financial Derivatives Pricing and Credit Valuation Adjustment," arabixiv.org 5uxef, Center for Open Science.
    • Handle: RePEc:osf:arabix:5uxef
    DOI: 10.31219/osf.io/5uxef
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    Cited by:

    1. is not listed on IDEAS
    2. Abdul Latif, Nurul Atikah, 2019. "The Impact of Liquidity Risk on Internal and External Factors," MPRA Paper 97222, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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