How do you price a basket of credit default swaps for example an n-th to default structure?
The main references are:
- David X. Li "Pricing Basket Credit Derivatives"
- Hull-White "Credit Default Swap II"
However, pricing a multiname credit derivative product basically
boils down to efficiently implementing a MonteCarlo simulation for
correlated random variables. The main decision to be taken is how
to model correlations. A Gaussian copula is at the moment the
market standard. Most practioners use it, although many of them
dislike it. Research in this field is still at a very preliminary
stage. The fact is that the Gaussian copula model is easy to
calibrate and allows for straightforward comparative statics (e.g.
calculation of the delta) while other more realistic and
complicated models (such as Darrel Duffies' affine models) are
still very difficult to calibrate and use.