The Analytic Pricing of Asymmetric Defaultable Swaps

G.M.B.J. Hübner

Research output: Contribution to journalArticleAcademicpeer-review

8 Citations (Scopus)

Abstract

Swaps where both parties are exposed to credit risk still lack convincing pricing mechanisms. This article presents a reduced-form model where the event of default is related to structural characteristics of each party. The cash flows submitted to credit risk are identified before the swap is priced. Analytical pricing formulas for interest rate and currency swaps are computed using a Gaussian model for risky bonds. Currency swaps exhibit additional correlation risk. The benefits from netting depend on the balance between exposures and market conditions in valuation. We show that sources of credit risk asymmetries are also likely to impact on credit spreads.
Original languageEnglish
Pages (from-to)295-316
JournalJournal of Banking & Finance
Volume25
Issue number2
DOIs
Publication statusPublished - 1 Jan 2001

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