Valuing Credit Default Swaps I: No Counterparty Default Risk

35 Pages Posted: 4 Nov 2008

See all articles by John C. Hull

John C. Hull

University of Toronto - Rotman School of Management

Alan White

University of Toronto - Rotman School of Management

Date Written: April 2000

Abstract

This paper provides a methodology for valuing credit default swaps when the payoff is contingent on default by a single reference entity and there is no counterparty defaultrisk. The paper tests the sensitivity of credit default swap valuations to assumptions about the expected recovery rate. It also tests whether approximate no-arbitrage arguments give accurate valuations and provides an example of the application of the methodology to real data. In a companion paper entitled Valuing Credit Default Swaps II: Modeling Default Correlation, the analysis is extended to cover situations where the payoff is contingent on default by multiple reference entities and situations where there is counterparty defaultrisk.

Suggested Citation

Hull, John C. and White, Alan, Valuing Credit Default Swaps I: No Counterparty Default Risk (April 2000). NYU Working Paper No. FIN-00-021. Available at SSRN: https://ssrn.com/abstract=1295226

John C. Hull

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 978-8615 (Phone)
416-971-3048 (Fax)

Alan White

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3689 (Phone)
416-971-3048 (Fax)

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