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Pricing Interest Rate Swap Subject to Bilateral Counterparty Risk

Author

Listed:
  • Alan White

    (RMUTT - Rajamangala University of Technology Thanyaburi)

Abstract

This paper presents an analytical model for valuing interest rate swaps, subject to bilateral counterparty credit risk. The counterparty defaults are 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

  • Alan White, 2019. "Pricing Interest Rate Swap Subject to Bilateral Counterparty Risk," Working Papers hal-02025925, HAL.
    • Handle: RePEc:hal:wpaper:hal-02025925
    Note: View the original document on HAL open archive server: https://hal.science/hal-02025925
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