The Valuation of Interest Rate Swap with Bilateral Counterparty Risk
Abstract
This paper presents an analytical model for valuing interest rate swaps, subject to bilateral counterparty credit risk. The counterparty defaults are modeled by the reduced-form model as the first jump of a time-inhomogeneous Poisson process. All quantities modeled are market-observable. The closed-form solution gives us a better understanding of the impact of the credit asymmetry on swap value, credit value adjustment, swap rate and swap spread.Author's Profile
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2020-10-14
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40 (#293,758)
6 months
9 (#95,670)
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References found in this work
A New Model for Pricing Collateralized Financial Derivatives.Tim Xiao - 2017 - Journal of Derivatives 24 (4):8-20.