Open AccessValuation of a Basket Loan Credit Default Swap
Author(s) -
Jin Liang,
Yujing Zhou
Publication year - 2010
Publication title -
international journal of financial research
Language(s) - English
Resource type - Journals
eISSN - 1923-4031
pISSN - 1923-4023
DOI - 10.5430/ijfr.v1n1p21
Subject(s) - prepayment of loan , valuation (finance) , loan , econometrics , credit default swap , credit risk , credit derivative , itraxx , actuarial science , swap (finance) , computer science , mathematics , economics , finance , credit valuation adjustment , credit reference
This paper provides a methodology for valuing a basket Loan CDS (LCDS) by considering both default and prepayment risks. Under “top down” and intensity framework, using a single-factor model, correlated default and prepayment risks are considered, where the stochastic interest rate is used to be their common factor. All stochastic processes in the model are assumed to follow CIR processes. Through Feynman-Kac formula, we obtain a PDE problem and its closed-form solution. Numerical examples are provided