Bilateral Counterparty Risk Valuation of CDS contracts with Simultaneous Defaults
Masterarbeit Mathematik
Supervision
Description
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.
Keywords
Credit Default Swaps, Counterparty Risk, Risk-neutral Credit Valuation Adjustment,
Default Intensity, Default Correlation, Simultaneous Default, Markov Copula Model.
References:
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CVA computation for counterparty risk assessment in credit portfolios,
In: Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging,
CVA, MBS, Ratings, and Liquidity. Bloomberg, 2011.
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Pricing and Hedging Portfolio Credit Derivatives in a Bottom-up Model with Simultaneous Defaults,
Working Paper, 2011.
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Bilateral Counterparty Risk Valuation with Stochastic Dynamical Models and Application to Credit Default Swaps,
Working Paper, 2009.
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Counterparty Risk and the Impact of Collateralization in CDS contracts,
Working Paper, 2011.
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- L. Teng, M. Ehrhardt, M. Günther,
Bilateral Counterparty Risk Valuation of CDS contracts with Simultaneous Defaults,
Preprint 13/01, January 2013.