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Sethi, Madhvi
- A Simulation Model for Pricing the Spread in a Credit Default Swap: Application and Analysis#
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1 Symbiosis Institute of Business Management Bengaluru, IN
1 Symbiosis Institute of Business Management Bengaluru, IN
Source
SDMIMD Journal of Management, Vol 9, No 1 (2018), Pagination: 9-18Abstract
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
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- Wen, Y., & Kinsella, J. (2013). Credit Default Swap- Pricing Theory, Real Data Analysis and Classroom Application Using Bloomberg Terminal. New York.