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Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization

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  • Alan White

Abstract

This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

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  • Alan White, 2018. "Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization," Papers 1803.07843, arXiv.org.
    • Handle: RePEc:arx:papers:1803.07843
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    References listed on IDEAS

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    Cited by:

    1. Misha Beek & Michel Mandjes & Peter Spreij & Erik Winands, 2020. "Regime switching affine processes with applications to finance," Finance and Stochastics, Springer, vol. 24(2), pages 309-333, April.

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