Multi Currency Credit Default Swaps Quanto effects and FX devaluation jumps

Brigo, Damiano; Pede, Nicola; Petrelli, Andrea

doi:10.48550/arxiv.1512.07256

Cited by 2 publications

(32 citation statements)

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“…We continue our description by considering a framework where all underlying stochastic processes do not experience a jump-at-default except the default process itself. So, this is similar to what is presented in Brigo et al (2015) with an exception that the interest rates in our model are stochastic. This will then be generalized with the allowance for jumps-at-default in other processes in Section 2.2.…”

Section: Modelsupporting

confidence: 87%

“…In other words, the theoretical price of the CDS contract in the foreign currency would be Z t CDS d . However, it is known that the market demonstrates a spread CDS f − Z t CDS d which could reach hundreds of bps, Brigo et al (2015). Hence, the availability of the market quotes on CDS contracts in both currencies together with the corresponding exchange rates allows one to capture these spreads.…”

Section: Modelmentioning

confidence: 99%

“…As shown in Brigo et al (2015) and mentioned in the introduction, including jump-at-default into the FX rate provides a more effective way of modeling the credit/FX dependency than the instantaneous correlations imposed among the driving Brownian motions of default intensity and FX rates. Moreover, the authors claim that it is not possible to explain the observed basis spreads during the Euro-debt crisis by using the latter mechanism alone.…”

Section: Jumps-at-default In Fx and Foreign Irmentioning

confidence: 99%

“…To add jumps to the dynamics of the FX rate in Eq. (3), we follow Brigo et al (2015); Bielecki et al (2005) who assume that at the time of default the FX rate experiences a single jump which is proportional to the current rate level, i.e.…”

Section: Jumps-at-default In Fx and Foreign Irmentioning

confidence: 99%

“…Therefore, in this paper we extend the framework of Brigo et al (2015) by introducing stochastic interest rates and account for jump-at-default in both FX and foreign (defaulted) interest rates. Our goal is to compare contribution of both jumps into the value of Quanto CDS spread.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Influence of jump-at-default in IR and FX on Quanto CDS prices

Itkin,

Shcherbakov,

Veygman

2017

Preprint

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We propose a new model for pricing Quanto CDS and risky bonds. The model operates with four stochastic factors, namely: hazard rate, foreign exchange rate, domestic interest rate, and foreign interest rate, and also allows for jumps-at-default in the FX and foreign interest rates. Corresponding systems of PDEs are derived similar to how this is done in Bielecki et al. (2005). A localized version of the RBF partition of unity method is used to solve these 4D PDEs. The results of our numerical experiments presented in the paper qualitatively explain the discrepancies observed in the marked values of CDS spreads traded in domestic and foreign economies.

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Section: Modelsupporting

confidence: 87%

Section: Modelmentioning

confidence: 99%

Section: Jumps-at-default In Fx and Foreign Irmentioning

confidence: 99%

Section: Jumps-at-default In Fx and Foreign Irmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Influence of jump-at-default in IR and FX on Quanto CDS prices

Itkin,

Shcherbakov,

Veygman

2017

Preprint

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Four-factor model of Quanto CDS with jumps-at-default and stochastic recovery

Itkin¹,

Soleymani²

2019

Preprint

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In this paper we modify the model of Itkin et al. (2019), proposed for pricing Quanto Credit Default Swaps (CDS) and risky bonds, in several ways. First, it is known since the Lehman Brothers bankruptcy that the recovery rate could significantly vary right before or at default, therefore, in this paper we consider it to be stochastic. Second, to reduce complexity of the model, we treat the domestic interest rate as deterministic, because, as shown in Itkin et al. ( 2019), volatility of the domestic interest rate does not contribute much to the value of the Quanto CDS spread. Finally, to solve the corresponding systems of 4D partial differential equations we use a different flavor of the Radial Basis Function (RBF) method which is a combination of localized RBF and finitedifference methods, and is known in the literature as RBF-FD. Results of our numerical experiments presented in the paper demonstrate that the influence of volatility of the recovery rate is significant if the correlation between the recovery rate and the log-intensity of the default is non-zero. Also, the impact of the recovery mean-reversion rate on the Quanto CDS spread could be significant and comparable with the impact due to jump-at-default in the FX rate.

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Multi Currency Credit Default Swaps Quanto effects and FX devaluation jumps

Cited by 2 publications

References 0 publications

Influence of jump-at-default in IR and FX on Quanto CDS prices

Influence of jump-at-default in IR and FX on Quanto CDS prices

Four-factor model of Quanto CDS with jumps-at-default and stochastic recovery

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