Valuing Credit Default Swaps I

• DOI: 10.3905/jod.2000.319115
• Publication Date: 2009-06-05T15:54:44Z
• Authors: John C. Hull; Alan D White
• Keywords: Issuer; Credit derivative; iTraxx; Embedded option; Credit spread (options); Bond valuation

One of the fastest growing areas both derivatives trading and research right now is in contracts based on credit risk. The default swap a standard instrument, offering possibility hedging against by issuer an underlying bond. Several existing valuation methodologies differ their assumptions about payoff case event. In this article, Hull White present approach realistic assumption that amount bondholders will claim difference between bond&'s post-default market value its face value. An important contribution article to use term structure risk-neutral implied probabilities obtained from prices for set bonds same issuer. dependence values assumed recovery rates shape yield curve are explored.