Munich Personal RePEc Archive

Pricing Interest Rate Swap Subject to Bilateral Counterparty Risk

Xiao, Tim (2019): Pricing Interest Rate Swap Subject to Bilateral Counterparty Risk.

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Abstract

This paper presents an analytical model for valuing interest rate swaps, subject to bilateral counterparty credit risk. The counterparty defaults are modeled by the reduced-form model as the first jump of a time-inhomogeneous Poisson process. All quantities modeled are market-observable. The closed-form solution gives us a better understanding of the impact of the credit asymmetry on swap value, credit value adjustment, swap rate and swap spread.

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