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The Pricing of Two Newly Invented Swaps in a Jump-Diffusion Model

Zhaojun Yang () and Chunhong Zhang ()
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Chunhong Zhang: Department of Financial Engineering, Hunan University

Annals of Economics and Finance, 2015, vol. 16, issue 2, 371-392

Abstract: This paper considers the pricing of contingent claims involved in two new swaps invented by Chinese entrepreneurs, the equity-for-guarantee swap (EGS) and the option-for-guarantee swap (OGS), when the cash flow of a firm that enters into the swaps follows a jump-diffusion process with jump sizes having a double exponential distribution. Using an equilibrium pricing approach, we provide explicit prices of all contingent claims and guarantee costs, where a Nash equilibrium of the game between the insurer and the borrower is derived. We present numerical analysis and find that OGS leads to an earlier default than EGS. As far as the borrower is concerned, EGS is better than OGS while keeping other parties the same. The advantage increases dramatically with the cash flow risk.

Keywords: Option-for-guarantee swap; Equity-for-guarantee swap; Guarantee costs; Nash equilibrium (search for similar items in EconPapers)
JEL-codes: G12 G23 (search for similar items in EconPapers)
Date: 2015
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