Valuation of a Credit Swap of the Basket Type

Author: Kijima M.

Source: Review of Derivatives Research, Volume 4, Number 1, June 2000 , pp. 81-97(17)

Publisher: Springer

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Abstract:

This article provides a simple model to value a credit swap of the basket type. Unlike the previous literature, we consider the joint survival probability of occurrence times of credit events in terms of stochastic intensity processes under the assumption of conditional independence. Based on the joint survival probability, such a credit swap can be valued under the risk-neutral valuation framework. Assuming that the default intensity processes follow the extended Vasicek model with a correlation structure, an analytic expression of the valuation formula is derived. Some numerical example is given to demonstrate the usefulness of our model.

Keywords: risk-neutral valuation; joint survival probability; default intensity process; conditional independence; extended Vasicek model

Language: English

Document Type: Regular paper

Affiliations: 1: Faculty of Economics, Tokyo Metropolitan University, 1-1 Minami-Ohsawa, Hachiohji, Tokyo 192-0397, Japan

Publication date: 2000-06-01