Journal of Credit Risk
ISSN:
1744-6619 (print)
1755-9723 (online)
Editor-in-chief: Linda Allen and Jens Hilscher
Recovery swaps
Arthur M. Berd
Abstract
ABSTRACT
We derive an arbitrage-free relationship between recovery swap rates, digital default swap spreads and conventional credit default swap (CDS) spreads, and argue that the fair forward recovery rate used in recovery swaps must contain a convexity premium over the expected recovery value.
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