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Counterparty Risk Valuation for CDS

by Christophette Blanchet-Scalliet of the Université de Lyon, and
Frédéric Patras of the Université de Nice

July 2, 2008

Abstract: The valuation of counterparty risk for single name credit derivatives requires the computation of joint distributions of default times of two default-prone entities. For a Merton-type model, we derive some formulas for these joint distributions. As an application, closed formulas for counterparty risk on a CDS or for a first-to-default swap on two underlyings are obtained.

Keywords: CDS, counterparty risk, first-to-default swap.

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