Valuation of kth-to-default credit-linked notes with counterparty risk in a reduced-form model

Kangquan Zhi, Xiaosong Qian and Ayu Xie

Communications in Statistics - Theory and Methods, 2023, vol. 52, issue 8, 2514-2537

Abstract: In this paper we analyze the kth-to-default credit-linked notes (CLN) with counterparty risk by the reduced-form model. We study the structure of the kth-to-default CLN and present a general valuation framework for CLN values and counterparty valuation adjustments (CVA) under the conditional independence assumption. Explicit formulas of the kth-to-default CLN values and their CVAs are obtained by the PDE approach. Numerical simulations are conducted to show the effects of the correlated default risk on the kth-to-default CLN values and their CVAs.

Date: 2023
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DOI: 10.1080/03610926.2021.1955383

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