The Valuation of Interest Rate Swap with Bilateral Counterparty Risk

Tim Xiao

Working Papers from HAL

Abstract: This paper presents an analytical model for valuing interest rate swaps, subject to bilateral counterparty credit risk. The counterparty defaults are modeled by the reduced-form model as the first jump of a time-inhomogeneous Poisson process. All quantities modeled are market-observable. The closed-form solution gives us a better understanding of the impact of the credit asymmetry on swap value, credit value adjustment, swap rate and swap spread.

Keywords: defaultable interest rate swap; bilateral defaultable claim; credit asymmetry; market models; Black model; LIBOR market model; reduced-form model; credit value adjustment; swap spread (search for similar items in EconPapers)
Date: 2019-06-30
Note: View the original document on HAL open archive server: https://hal.science/hal-02169144v1
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Working Paper: The Valuation of Interest Rate Swap with Bilateral Counterparty Risk (2019)
Working Paper: The Valuation of Interest Rate Swap with Bilateral Counterparty Risk (2019)
Working Paper: The Valuation of Interest Rate Swap with Bilateral Counterparty Risk (2019)
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