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Credit Derivative Evaluation and CVA under the Benchmark Approach

Jan Baldeaux and Eckhard Platen ()

No 324, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: In this paper, we discuss how to model credit risk under the benchmark approach. Firstly we introduce an affine credit risk model. We then show how to price credit default swaps (CDSs) and introduce credit valuation adjustment (CVA) as an extension of CDSs. In particular, our model can capture right-way - and wrong-way exposure. This means, we capture the dependence structure of the default event and the value of the transaction under consideration. For simple contracts, we provide closed-form solutions. However, due to the fact that we allow for a dependence between the default event and the value of the transaction, closed-form solutions are difficult to obtain in general. Hence we conclude this paper with a reduced form model, which is more tractable.

Keywords: Credit derivatives; credit valuation adjustment; benchmark approach; affine processes; real world pricing (search for similar items in EconPapers)
JEL-codes: C10 C15 G10 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2013-02-01
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published as: Baldeaux, J. and PLaten, E., 2015, "Credit Derivative Evaluation and CVA under the Benchmark Approach", Asia-Pacific Financial Markets, 22(3), 305-331.

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https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp324.pdf (application/pdf)

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