Pricing credit derivatives using an asymptotic expansion approach

Yoshifumi Muroi

Journal of Computational Finance

Abstract: ABSTRACT The prices of credit derivatives within multiple defaultable entities are evaluated in this paper using the asymptotic expansion approach. The theoretical prices of credit derivatives such as credit default swaptions are often analytically intractable. However, recent developments in the asymptotic expansion method permit an easier evaluation of these contingent claims. This paper provides the prices of credit default swaps and swaptions, taking account of counterparty credit risks. By using the asymptotic expansion approach we can evaluate the price of various kinds of credit derivatives under the many specific and popular models, such as affine models and constant elasticity of variance models.

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