Abstract: ABSTRACT 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.
Publication Year: 1996
Publication Date: 1996-07-01
Language: en
Type: article
Indexed In: ['crossref']
Access and Citation
Cited By Count: 449
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot