Bergische Universität Wuppertal
Fachbereich Mathematik und Naturwissenschaften
Angewandte Mathematik - Numerische Analysis


Bilateral Counterparty Risk Valuation of CDS contracts with Simultaneous Defaults

Masterarbeit Mathematik



In this thesis we analyze the general risk-neutral valuation for counterparty risk embedded in a Credit Default Swap (CDS) contract by adapting the recent findings of Brigo and Capponi to allow for simultaneous defaults among the two parties and the underlying reference credit, while the counterparty risk is considered bilaterally. For the default intensities we employ a Markov copula model allowing for the possibility of a simultaneous default. The dependence between defaults of three names in a CDS contract and the wrong-way risk will thus be represented by the possibility of simultaneous defaults.

Using our numerical results we investigate the effect of considering simultaneous defaults on the counterparty risk valuation of a CDS contract. Finally, we study a CDS contract between Royal Dutch Shell and British Airways based on Lehman Brothers applying this methodology, illustrating the bilateral adjustments with the possibility of simultaneous defaults in concrete crisis situations.


Credit Default Swaps, Counterparty Risk, Risk-neutral Credit Valuation Adjustment, Default Intensity, Default Correlation, Simultaneous Default, Markov Copula Model.


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  2. T.R. Bielecki, A. Cousin, S. Crépey, A. Herbertsson, Pricing and Hedging Portfolio Credit Derivatives in a Bottom-up Model with Simultaneous Defaults, Working Paper, 2011.
  3. D. Brigo, A. Capponi, Bilateral Counterparty Risk Valuation with Stochastic Dynamical Models and Application to Credit Default Swaps, Working Paper, 2009.
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  8. D. Brigo, L. Cousot, The Stochastic Intensity SSRD Model Implied Volatility Patterns for Credit Default Swap Options and the Impact of Correlation, Int. J. Theoret. Appl. Fin. 9 (2006), 315-339.
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  10. T.R. Bielecki, S. Crépey, M. Jeanblanc, B. Zargari, Valuation and Hedging of CDS Counterparty Exposure in A Markov Copula Model, Int. J. Theoret. Appl. Fin. 15 (2012), 1250004.
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  12. L. Teng, M. Ehrhardt, M. Günther, Bilateral Counterparty Risk Valuation of CDS contracts with Simultaneous Defaults, Preprint 13/01, January 2013.

University of Wuppertal
Faculty of Mathematics and Natural Sciences
Department of Mathematics
Applied Mathematics & Numerical Analysis Group

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