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The Valuation of Interest Rate Swap with Bilateral Counterparty Risk

Tim Xiao

No 8b9p4, FrenXiv from Center for Open Science

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.

Date: 2019-05-02
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Persistent link: https://EconPapers.repec.org/RePEc:osf:frenxi:8b9p4

DOI: 10.31219/osf.io/8b9p4

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