Journal ArticleDOI
Pricing Swap Default Risk
Reads0
Chats0
TLDR
In this paper, a model of swap default risk evaluates jointly the probability of the swap counterparty defaulting and the cost (or impact) of the default for the solvent party, which helps to establish the correct level for a swap between risky (or potentially risky) parties.Abstract:
With the growth in the market for interest rate swaps has come a growing need to understand the potential default risks of these instruments. In general, swap participants can deal with default risk by seeking to mitigate it (by dealing only with AAA-rated counterparties, for example). Alternatively, potential counterparties can attempt to come to some agreement about the degree of default risk and use that knowledge to "price" their positions. A model of swap default risk evaluates jointly the probability of the swap counterparty defaulting and the cost (or impact) of the default for the solvent party. The model helps to establish the correct level for a swap between risky (or potentially risky) parties. The key considerations are the swap parties' credit conditions and the shape and volatility of the yield curve.read more
Citations
More filters
Journal ArticleDOI
An Econometric Model of the Term Structure of Interest-Rate Swap Yields
TL;DR: The authors developed a multi-factor econometric model of the term structure of interest-rate swap yields, which accommodates the possibility of counterparty default, and any differences in the liquidities of the Treasury and Swap markets.
Journal ArticleDOI
Estimating the Price of Default Risk
TL;DR: The standard theoretical paradigm for modeling credit risks is the contingent claims approach pioneered by Black and Scholes as mentioned in this paper, which explicitly links the risk of a firm's default to the variability in the firm's asset value.
Journal ArticleDOI
Swap Rates and Credit Quality
Darrell Duffie,Ming Huang +1 more
TL;DR: In this article, the authors present a model for valuing claims subject to default by both contracting parties, such as swaps and forwards, and show that the impact of credit risk asymmetry on swap rates is linear within the range of normally encountered credit quality.
Journal ArticleDOI
Counterparty Credit Risk and the Credit Default Swap Market
TL;DR: In this paper, the authors examined how counterparty credit risk is actually priced in the CDS market and found that the magnitude of the effect is vanishingly small and is consistent with a market structure in which participants require collateralization of swap liabilities by counterparties.
Book
Counterparty Credit Risk, Collateral and Funding: With Pricing Cases For All Asset Classes
TL;DR: In this article, the authors focus on rigorous and advanced quantitative methods for the pricing and hedging of counterparty credit and funding risk, and propose a new general theory that is required for this methodology, leading to a consistent and comprehensive framework for counterparty risk, including collateral, netting rules, possible debit valuation adjustments, re-hypothecation and closeout rules.