Basics of Credit Risk - Universität Hohenheim
Basics of Credit Risk - Universität Hohenheim
Basics of Credit Risk - Universität Hohenheim
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Investment Banking and Capital Markets – <strong>Universität</strong> <strong>Hohenheim</strong><br />
Investment Banking and Capital Markets<br />
<strong>Credit</strong> Default Swaps – Valuation<br />
◮ To determine V DL , we have to formalise the default payment (1 − Rec)<br />
and the accrued premium<br />
◮ To keep things simple, we assume that defaults occur in the middle <strong>of</strong> τi−1<br />
and τi, the accrual factor will be ∆τ<br />
: mid-point approximation<br />
2<br />
◮ Thus:<br />
V DP = (1 − Rec)<br />
V AP =<br />
mX<br />
i=1<br />
mX<br />
R(τi) · (S(τi−1) − S(τi)) (36)<br />
i=1<br />
c(τm) · ∆τ<br />
2 · R(τi) · (S(τi−1) − S(τi)) (37)<br />
Chair for Banking and Finance Winter term 2009 Slide 26
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