Valuation of credit default swaps and swaptions

Farshid Jamshidian

Finance and Stochastics, 2004, vol. 8, issue 3, 343-371

Abstract: This paper presents a conceptual and general framework for valuation of single-name credit derivatives. The general subfiltration approach of [J-R] to modelling default risk, which includes the Cox-process setting of [L], is integrated with a numeraire invariant approach. Several known results are reformulated and extended in this framework. New concepts and results are presented for change of numeraire in presence of default and valuation of credit swaptions. A new formula on fractional recovery of pre-default value is derived, generalizing that of [D-S]. A Black-Scholes formula for credit default swaptions due to [S] is shown to serve as a least-squares approximation to the general case. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Credit default swap; swaption; swap rate; subfiltration; conditional survival probability; preprice; prenumeraire; recovery; coadapted numeraires (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (28)

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DOI: 10.1007/s00780-004-0122-y

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