Pricing constant maturity credit default swaps under jump

Henrik Jönsson, Wim Schoutens

Abstract

ABSTRACT

In this paper we discuss the pricing of constant-maturity credit default swaps under single-sided jump models. The constant-maturity credit default swap offers default protection in exchange for a floating premium that is periodically reset and indexed to the market spread on a credit default swap with constant-maturity tenor written on the same reference name.By setting up a firm's value model based on single-sided Lévy models we can generate dynamic spreads for the reference credit default swap. The valuation of the constant-maturity credit default swap can then easily be done by Monte Carlo simulation.