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Hedging of a credit default swaption in the CIR default intensity model

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Abstract

An important issue arising in the context of credit default swap (CDS) rates is the construction of an appropriate model in which a family of options written on credit default swaps, referred to hereafter as credit default swaptions, can be valued and hedged. The goal of this work is to exemplify the usefulness of some abstract hedging results, which were obtained previously by the authors, for the valuation and hedging of the credit default swaption in a particular hazard process setup, namely, the CIR default intensity model.

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Authors and Affiliations

  1. Department of Applied Mathematics, Illinois Institute of Technology, Chicago, IL, 60616, USA

    Tomasz R. Bielecki

  2. Département de Mathématiques, Institut Europlace de Finance, Université d’Évry Val d’Essonne, 91025, Evry Cedex, France

    Monique Jeanblanc

  3. School of Mathematics and Statistics, University of Sydney, Sydney, NSW, 2006, Australia

    Marek Rutkowski

Authors
  1. Tomasz R. Bielecki
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  2. Monique Jeanblanc
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  3. Marek Rutkowski
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Corresponding author

Correspondence to Tomasz R. Bielecki.

Additional information

The research of T.R. Bielecki was supported by NSF Grant 0604789.

The research of M. Jeanblanc benefited from the support of the “Chaire Risque de Crédit”, Fédération Bancaire Française.

The research of M. Rutkowski was supported under Australian Research Council’s Discovery Projects funding scheme (DP0881460).

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Bielecki, T.R., Jeanblanc, M. & Rutkowski, M. Hedging of a credit default swaption in the CIR default intensity model. Finance Stoch 15, 541–572 (2011). https://doi.org/10.1007/s00780-010-0143-7

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  • DOI: https://doi.org/10.1007/s00780-010-0143-7

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