Fast Valuation of Forward-Starting Basket Default Swaps (original) (raw)

2010, International Journal of Theoretical and Applied Finance

A basket default swap (BDS) is a credit derivative with contingent payments that are triggered by a combination of default events of the reference entities. A forward-starting basket default swap (FBDS) is a BDS starting at a specified future time. Existing analytic or semi-analytic methods for pricing FBDS are time consuming due to the large number of possible default combinations before the BDS starts. This paper develops a fast approximation method for FBDS based on the conditional independence framework. The method converts the pricing of a FBDS to an equivalent BDS pricing problem and combines Monte Carlo simulation with an analytic approach to achieve an effective method. This hybrid method is a novel technique which can be viewed either as a means to accelerate the convergence of Monte Carlo simulation or as a way to estimate parameters in an analytic method that are difficult to compute directly. Numerical results demonstrate the accuracy and efficiency of the proposed hybri...

Valuation of basket credit default swaps under stochastic default intensity models

Advances in Applied Mathematics and Mechanics, 2020

Portfolio credit derivatives, including the basket credit default swaps, are designed to facilitate the transfer of credit risk amongst market participants. Investors consider them as cheap tools to hedge a portfolio of credits, instead of individual hedging of the credits. The prime aim of this work is to model the hazard rate process using stochastic default intensity models, as well as extend the results to the pricing of basket default swaps. We focused on the nth-to-default swaps whereby the spreads are dependent on the nth default time, and we estimated the joint survival probability distribution functions of the intensity models under the risk-neutral pricing measure, for both the homogeneous and the heterogeneous portfolio. This work further employed the Monte-Carlo method, under the one-factor Gaussian copula model to numerically approximate the distribution function of the default time, and thus, the numerical experiments for pricing the nth default swaps were made viable....

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