Pricing of CDS Options with the HJM approach: a Numerical Implementation

Viviana Fanelli () and Silvana Musti ()

Quaderni DSEMS from Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia

Abstract: This paper provides CDS option pricing in a probability setting equipped with a subfiltration structure. The evolution of the defaultable term structure is modelled using the approach developed in Heath et al. (1992) when the spot rate and the forward rate affect the volatility term. The Euler-Maruyama stochastic integral approximation and the Monte Carlo method are applied to develop a numerical algorithm for pricing. Finally, the Antithetic Variables technique is used to reduce the variance of estimations.

Keywords: HJM model; Cox process; Monte Carlo method; CDS option (search for similar items in EconPapers)
JEL-codes: C63 G13 G33 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2007-12
New Economics Papers: this item is included in nep-cfn and nep-ore
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