Valuing Plain-Vanilla, Binary and Idealized Credit Default Swaps without Counterparty Default Risk

• Main Authors: I-Lung Hsu, 許藝瀧
• Other Authors: Kenneth Palmer
• Format: Others
• Language: en_US
• Published: 2007
• Online Access: http://ndltd.ncl.edu.tw/handle/33566454147927648602

碩士 === 臺灣大學 === 數學研究所 === 95 === Credit default swap (CDS) is a financial derivative which can transfer credit risk from one party to another. In this thesis, we prove that the present value of a corporate bond is equal to the present value of the Treasury bond with the same payoffs minus the present value of loss by default, which is an assumption in Hull and White (2000). Following Hull and White, we also exhibit how to extract risk-neutral probabilities of default from bond prices and use them to value the swap rates of a plain-vanilla and a binary CDS. In addition, we derive an upper and a lower bound on the swap rate of a binary CDS under our assumptions. Furthermore, we detail the argument about the swap rate of an idealized CDS which is defined in Hull and White (2000). Moreover, we also define another idealized CDS in a different case and value its swap rate. In both case, we use both direct arbitrage arguments and also the appropriate risk-neutral pricing formula.