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NEW MODEL FOR PRICING QUANTO CREDIT DEFAULT SWAPS

Author:
Itkin, A.  Shcherbakov, V  Veygman, A.  


Journal:
INTERNATIONAL JOURNAL OF THEORETICAL AND APPLIED FINANCE


Issue Date:
2019


Abstract(summary):

We propose a new model for pricing quanto credit default swaps (CDS) and risky bonds. The model operates with four stochastic factors, namely: the hazard rate, the foreign exchange rate, the domestic interest rate, and the foreign interest rate, and allows for jumps-at-default in both the foreign exchange rate and the foreign interest rate. Corresponding systems of partial differential equations are derived similar to how this is done by Bielecki et al. [PDE approach to valuation and hedging of credit derivatives, Quantitative Finance 5 (3), 257-270]. A localized version of the Radial Basis Function partition of unity method is used to solve these four-dimensional equations. The results of our numerical experiments qualitatively explain the discrepancies observed in the marked values of CDS spreads traded in domestic and foreign economies.


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