Investing and Financial Markets
Insurance

How do you price a basket of credit default swaps for example an n-th to default structure?

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Wiki User
2007-06-28 07:41:58

The main references are:

  1. David X. Li "Pricing Basket Credit Derivatives"
  2. 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.


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