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Hedging of Credit Default Swaptions in a Hazard Process Model

by Tomasz Bielecki of the Illinois Institute of Technology,
Monique Jeanblanc of the UniversitÚ d'╔vry Val d'Essonne & Institut Europlace de Finance, and
Marek Rutkowski of the University of New South Wales & Warsaw University of Technology

December 14, 2008

Abstract: The paper discusses valuation and hedging of CDS swaptions using the hazard process methodology. Various approaches to modeling of conditional survival density are discussed. A detailed analysis of valuation and replication of CDS swaptions in the CIR framework is provided.

Keywords: CDS swaptions, conditional survival density, immersion property, Ito-Kunita-Wentzell formula, CIR intensity.

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