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Swap Rates and Credit Quality
Author(s) -
DUFFIE DARRELL,
HUANG MING
Publication year - 1996
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1996.tb02712.x
Subject(s) - swap (finance) , interest rate swap , credit default swap , itraxx , credit default swap index , credit derivative , counterparty , credit valuation adjustment , business , credit risk , synthetic cdo , economics , financial economics , actuarial science , finance , credit reference
This article presents a model for valuing claims subject to default by both contracting parties, such as swaps and forwards. With counterparties of different default risk, the promised cash flows of a swap are discounted by a switching discount rate that, at any given state and time, is equal to the discount rate of the counterparty for whom the swap is currently out of the money (that is, a liability). The impact of credit‐risk asymmetry and of netting is presented through both theory and numerical examples, which include interest rate and currency swaps.