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Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization

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  • Tim, Xiao

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.

Suggested Citation

  • Tim, Xiao, 2019. "Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization," MPRA Paper 94701, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:94701
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    File URL: https://mpra.ub.uni-muenchen.de/94701/1/MPRA_paper_94701.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    valuation model; credit risk modeling; collateralization; correlation; CDS.;
    All these keywords.

    JEL classification:

    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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