Pricing Interest Rate Swap Subject to Bilateral Counterparty Risk

Alan White ()
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Alan White: RMUTT - Rajamangala University of Technology Thanyaburi

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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.

Keywords: credit asymmetry; bilateral defaultable claim; defaultable interest rate swap; Black model; market models; LIBOR market model; reduced-form model; credit value adjustment; swap spread (search for similar items in EconPapers)
Date: 2019-02-22
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