Pricing Interest Rate Swap Subject to Bilateral Counterparty Risk

Tim Xiao

MPRA Paper from University Library of Munich, Germany

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)
JEL-codes: C52 G12 G13 (search for similar items in EconPapers)
Date: 2019-05-30
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:94233

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