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Pricing for Basket CDS and LCDS
Department of Mathematics, Tongji University, Shanghai, China
Department of Mathematics, Tongji University, Shanghai, China
Department of Mathematics, Tongji University, Shanghai, China
- 1 Department of Mathematics, Tongji University, Shanghai, China
- 2 Department of Mathematics, Tongji University, Shanghai, China
- 3 Department of Mathematics, Tongji University, Shanghai, China
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Abstract
In this paper, under the reduced form framework and “Bottom Up” method, a model for pricing a basket Loan-only Credit Default Swap (LCDS), with the negative correlation between prepayment and default, is established. A general pricing formula for it is obtained, where one factor CIR (Cox-Ingersoll-Ross) and ICIR (Inversed CIR) models are used to describe the negative correlation between prepayment and default. In this situation, the positivity of prepayment and default intensity processes are guaranteed. Numerical computations are presented.
KeywordsBasket Loan-Only Credit Default SwapPrepayment RiskBottom UpReduced FormOne Factor ICIR Model
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