Journal of Credit Risk
ISSN:
1744-6619 (print)
1755-9723 (online)
Editor-in-chief: Linda Allen and Jens Hilscher
Collateralized credit default swaps and default dependence: implications for the central counterparties
Masaaki Fujii and Akihiko Takahashi
Abstract
ABSTRACT
We study the pricing of a continuously collateralized credit default swap (CDS). We make use of the "survival measure" to derive the pricing formula in a straightforward way. As a result, we find that, even under a perfect collateralization, there exists an unremovable trace of the counterparty and the investor in the pricing of CDSs due to their default dependence, even though the hazard rates of the two parties are totally absent from the pricing formula. As an important implication, we also study the situation in which the investor enters an offsetting back-to-back trade with another counterparty. We provide simple numerical examples to demonstrate the change in a fair CDS premium level according to the strength of default dependence among the relevant names. We then discuss possible implications for the risk management of the central counterparties.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net