Munich Personal RePEc Archive

Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization

White, Alan (2018): Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization.

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Abstract

This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

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