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Swap Rates and Credit Quality

1996; Wiley; Volume: 51; Issue: 3 Linguagem: Inglês

10.2307/2329227

1540-6261

Darrell Duffie, Mingxin Huang,

Insurance and Financial Risk Management

The Journal of FinanceVolume 51, Issue 3 p. 921-949 Article Swap Rates and Credit Quality DARRELL DUFFIE, DARRELL DUFFIESearch for more papers by this authorMING HUANG, MING HUANG* Duffie is from the Graduate School of Business, Stanford University, and Huang is from the Graduate School of Business, University of Chicago. We are grateful for discussions with Ken Singleton and comments from Kerry Back, Peter DeMarzo, Philip Dybvig, John Hull, Francis Longstaff, Dilip Madan, Jesús Saá-Requejo, Eduardo Schwartz, Ashok Varadhan, and Zvi Wiener.Search for more papers by this author DARRELL DUFFIE, DARRELL DUFFIESearch for more papers by this authorMING HUANG, MING HUANG* Duffie is from the Graduate School of Business, Stanford University, and Huang is from the Graduate School of Business, University of Chicago. We are grateful for discussions with Ken Singleton and comments from Kerry Back, Peter DeMarzo, Philip Dybvig, John Hull, Francis Longstaff, Dilip Madan, Jesús Saá-Requejo, Eduardo Schwartz, Ashok Varadhan, and Zvi Wiener.Search for more papers by this author First published: July 1996 https://doi.org/10.1111/j.1540-6261.1996.tb02712.xCitations: 219 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat 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. REFERENCES Abken, P., 1993, Valuation of default-risky interest-rate swaps, Advances in Futures and Options Research 6, 93–116. Antonelli, F., 1993, Backward-forward stochastic differential equations, Annals of Applied Probability 3, 777–793. Artzner, P., and F. Delbaen, 1992, Credit risk and prepayment option, ASTIN Bulletin 22, 81–96. 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Sundaresan, S., 1991, Valuation of swaps, in Recent Developments in International Banking and Finance, S. Khoury, ed. Amsterdam: North Holland (Vols IV and V). Citing Literature Volume51, Issue3July 1996Pages 921-949 ReferencesRelatedInformation