Semi-analytic pricing formulas for basket credit-linked notes with and without counterparty risks

Systems Science & Control Engineering

Junmei Ma¹  Xiaomei Zhang²  Xuan Yang²  Yongzeng Lai³ 

[1] Shanghai University of Finance and Economics, and Shanghai Key Laboratory of Financial Information Technology;Shanghai University of Finance and Economics;Wilfrid Laurier University;

关键词: basket cln;    counterparty risk;    hazard rate;    partial differential equation;    affine structure;   

DOI  :  10.1080/21642583.2020.1851804

来源: DOAJ

【 摘 要 】

This paper discusses the pricing of basket credit linked notes (BCLN) under the reduced model. Three types of BCLNs are discussed: the first, the second and the mth-to-default BCLNs with and without counterparty risks. Based on conditional independence, the joint distribution of default times can be calculated and thus the price problems are transformed into partial differential equation (PDE) forms. Then the semi-analytical pricing formulas for the above BCLNs are obtained with PDE method and the calculation of credit valuation adjustments are also obtained. Finally, numerical test results show the high precision of the derived pricing formulas.

【 授权许可】

Unknown