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  • Alternative Approaches Towards Valuation of CDS Index Options

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    Genko Vasilev
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    This document discusses alternative approaches for valuing credit default swap (CDS) index options. It notes that CDS rates do not always follow a lognormal or normal distribution and can depend on the credit quality of the underlying reference entity. A reasonable assumption, it suggests, is that the conditional default-adjusted forward CDS index rate follows a displaced diffusion process. It then references several papers on pricing CDS options using models like the Cox-Ingersoll-Ross default intensity model that can account for shifts and jumps in the rate.

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    This document discusses alternative approaches for valuing credit default swap (CDS) index options. It notes that CDS rates do not always follow a lognormal or normal distribution and can depend on the credit quality of the underlying reference entity. A reasonable assumption, it suggests, is that the conditional default-adjusted forward CDS index rate follows a displaced diffusion process. It then references several papers on pricing CDS options using models like the Cox-Ingersoll-Ross default intensity model that can account for shifts and jumps in the rate.

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    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
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    6 views1 page

    Alternative Approaches Towards Valuation of CDS Index Options

    Uploaded by

    Genko Vasilev
    This document discusses alternative approaches for valuing credit default swap (CDS) index options. It notes that CDS rates do not always follow a lognormal or normal distribution and can depend on the credit quality of the underlying reference entity. A reasonable assumption, it suggests, is that the conditional default-adjusted forward CDS index rate follows a displaced diffusion process. It then references several papers on pricing CDS options using models like the Cox-Ingersoll-Ross default intensity model that can account for shifts and jumps in the rate.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    Alternative approaches towards valuation of CDS index options - Some empirical research works have suggested that the

    dynamical behaviour of credit defaults swap rates tend to be complex and neither completely lognormal nor normal. In general it is close to normal distribution for high credit uality reference names and lognormal distribution for low uality reference names. !herefore" a reasonable assumption would be that the conditional default-adjusted forward CD index swap rate follows the displaced diffusion process. # $ackel- %&&'# - (ricing of credit default swaptions in the CI) default intensity model # *ielecki -%&++#" and extended version of the CI)-process where shifts and ,umps can be also included # *rigo - .l-*achir" %&&/#

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