NEW MODEL FOR PRICING QUANTO CREDIT DEFAULT SWAPS

Andrey Itkin (), V. Shcherbakov () and A. Veygman ()
Additional contact information
V. Shcherbakov: Department of Information Technology, Division of Scientific Computing, Uppsala University, Box 337, 751 05 Uppsala, Sweden
A. Veygman: HSBS, New York, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2019, vol. 22, issue 03, 1-37

Abstract: We propose a new model for pricing quanto credit default swaps (CDS) and risky bonds. The model operates with four stochastic factors, namely: the hazard rate, the foreign exchange rate, the domestic interest rate, and the foreign interest rate, and allows for jumps-at-default in both the foreign exchange rate and the foreign interest rate. Corresponding systems of partial differential equations are derived similar to how this is done by Bielecki et al. [PDE approach to valuation and hedging of credit derivatives, Quantitative Finance 5 (3), 257–270]. A localized version of the Radial Basis Function partition of unity method is used to solve these four-dimensional equations. The results of our numerical experiments qualitatively explain the discrepancies observed in the marked values of CDS spreads traded in domestic and foreign economies.

Keywords: Quanto credit default swaps; reduced form models; jump-at-default; stochastic interest rates; radial basis function method (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024919500031

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