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CDS_pricing Powered By Docstoc
					Pricing models. Credit Default Swaps
Prof. Giampaolo Gabbi - University of Siena
March 2010



CDS pricing (Hull approach)

Data
                Main PD            2.00%

                    Time               PD     Survival probability
                       1           2.00%                 98.00%
                       2           1.96%                 96.04%
                       3           1.92%                 94.12%
                       4           1.88%                 92.24%
                       5           1.84%                 90.39%

Expected payments
           Main Payment                1
                     rf               2%

                    Time            Psurv            E(Payment)
                       1          98.00%               0.980000
                       2          96.04%               0.960400
                       3          94.12%               0.941192
                       4          92.24%               0.922368
                       5          90.39%               0.903921



Expected payoff
           Recovery rate             40%

                    Time               PD                     Rec
                      0.5          2.00%                     40%
                      1.5          1.96%                     40%
                      2.5          1.92%                     40%
                      3.5          1.88%                     40%
                      4.5          1.84%                     40%


         PV(accrual payment)
         Time of accrual             50%

                    Time               PD       E(accrual paym)
                      0.5          2.00%                 0.0100
                      1.5          1.96%                 0.0098
                      2.5          1.92%                 0.0096
                      3.5          1.88%                 0.0094
                      4.5          1.84%                 0.0092
CDS price
Such that               4.4874
equals                  0.0549
CDS price              0.01224

CDS spread in basis points       122.4059
122.4059 in basis points




         DF    PV(E(Payment))
     0.9804            0.9608
     0.9612            0.9231
     0.9423            0.8869
     0.9238            0.8521
     0.9057            0.8187
                       4.4416




  LGD
   E(Payoff)      DF      PV(E(Payoff))
    1.200%      0.9901          0.0119
    1.176%      0.9707          0.0114
    1.152%      0.9517          0.0110
    1.129%      0.9330          0.0105
    1.107%      0.9147          0.0101
                                0.0549




         DF      PV(E(Payoff))
     0.9901            0.0099
     0.9707            0.0095
     0.9517            0.0091
     0.9330            0.0088
     0.9147            0.0084
0.0458

				
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posted:10/5/2011
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