
 Constant Maturity Credit Default Swap Pricing with Market Models by Damiano Brigo of Banca IMI March 2, 2005 Abstract: In this work we derive an approximated noarbitrage market valuation formula for Constant Maturity Credit Default Swaps (CMCDS). We move from the CDS options market model in Brigo (2004), and derive a formula for CMCDS that is the analogous of the formula for constant maturity swaps in the default free swap market under the LIBOR market model. A "convexity adjustment"like correction is present in the related formula. Without such correction, or with zero correlations, the formula returns an obvious deterministiccreditspread expression for the CMCDS price. To obtain the result we derive a joint dynamics of forward CDS rates under a single pricing measure, as in Brigo (2004). Numerical examples of the "convexity adjustment" impact complete the paper. Keywords: CDS Options, CDS Options Market Model, Constant Maturity CDS, Convexity Adjustment, Participation Rate, CDS rates volatility, CDS rates correlation. Books Referenced in this paper: (what is this?) 