Specialeforsvar ved Anders Christensen – University of Copenhagen

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Specialeforsvar ved Anders Christensen

Specialeforsvar ved Anders Christensen

Titel: Credit valuation Adjustment for Interest Rate Derivatives under Correlation between Default Time and Interest Rates 

Abstract: We consider counterparty risk pricing for interest rate payoffs in presence of correlation between the default event and interest rates. In particular, we analyze in detail default-risky interest-rate swaps and option payoffs under counterparty risk. We implement a model that is stochastic both in interest rates and in default intensity. Joint stochasticity is needed in order to introduce correlation. The interest rate sector is modeled according to a shifted two-factor Gaussian short-rate process while the default intensity sector is modelled according to a square-root process. We have found that counterparty risk has a relevant impact on interest rate payoffs prices and that, in turn, the correlation between interest rates and default intensity has a relevant impact on the adjustment due to counterparty risk.

 

Vejleder:  Rolf Poulsen
Censor:    Bjarne Astrup Jensen, CBS