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In Rememberance: World Trade Center (WTC)

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Valuing Credit Default Swaps I: No Counterparty Default Risk

by John Hull of the University of Toronto, and
Alan White of the University of Toronto

April 2000

Abstract:  This paper provides a methodology for valuing credit default swaps when the payoff is contingent on default by a single reference entity and there is no counterparty default risk. The paper tests the sensitivity of credit default swap valuations to assumptions about the expected recovery rate. It also tests whether approximate no-arbitrage arguments give accurate valuations and provides an example of the application of the methodology to real data. In a companion paper entitled Valuing Credit Default Swaps II: Modeling Default Correlation, the analysis is extended to cover situations where the payoff is contingent on default by multiple reference entities and situations where there is counterparty default risk.

Published in: Journal of Derivatives, Vol. 8, No. 1, (Fall 2000), pp. 29-40.

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