SDMIMD Journal of Management

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A Simulation Model for Pricing the Spread in a Credit Default Swap: Application and Analysis#


Affiliations
1 Symbiosis Institute of Business Management Bengaluru, India
 

This paper explores pricing the contract of a Credit Default Swap (CDS) using a simulation model. It attempts to determine the spread value which is a periodic payment to be made by the protection buyer. It also helps in identifying the factors that should be taken into account to determine the true value of the payment which would hedge the risk in case of a credit event by the issuer of the underlying asset. The paper uses the Hull and White pricing model for creating the simulation model. This model is then applied to analyse CDSs of countries having different credit ratings. The paper using the model analyses the actual and estimated spread of the different countries and discusses the possible reasons for the same. 

Keywords

Credit Default Swap, Simulation, Spreads.
User
Notifications

  • Duffie, D. (1999). Credit Swap Valuation. Financial Analysts Journal.

  • Hull, J. C. Options Futures and Other Derivatives, Seventh Edition.

  • Hull, J. C., & White, A. (2000, April). Valuiing Credit Default Swaps I: No Counterparty Default Risk. Toronto, Canada.

  • Jarrow, R. A., & Turnbull, S. (1995). Pricing Options on Derivative Securities Subject to Credit Risk.

  • Moody’s. (2017). Annual Sovereign Default Study and Rating Transitions.

  • Security Exchange Commission. A new look at the role of Sovereign Credit Default Swap.

  • Wen, Y., & Kinsella, J. (2013). Credit Default Swap- Pricing Theory, Real Data Analysis and Classroom Application Using Bloomberg Terminal. New York.


Abstract Views: 354

PDF Views: 106




  • A Simulation Model for Pricing the Spread in a Credit Default Swap: Application and Analysis#

Abstract Views: 354  |  PDF Views: 106

Authors

Madhvi Sethi
Symbiosis Institute of Business Management Bengaluru, India
Parthiv Thakkar
Symbiosis Institute of Business Management Bengaluru, India
Zahid M. Jamal
Symbiosis Institute of Business Management Bengaluru, India

Abstract


This paper explores pricing the contract of a Credit Default Swap (CDS) using a simulation model. It attempts to determine the spread value which is a periodic payment to be made by the protection buyer. It also helps in identifying the factors that should be taken into account to determine the true value of the payment which would hedge the risk in case of a credit event by the issuer of the underlying asset. The paper uses the Hull and White pricing model for creating the simulation model. This model is then applied to analyse CDSs of countries having different credit ratings. The paper using the model analyses the actual and estimated spread of the different countries and discusses the possible reasons for the same. 

Keywords


Credit Default Swap, Simulation, Spreads.

References





DOI: https://doi.org/10.18311/sdmimd%2F2018%2F20024