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Valuation and hedging of cds counterparty exposure in a markov copula model

Bielecki, T. R ; Sharif University of Technology

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  1. Type of Document: Article
  2. DOI: 10.1142/S0219024911006498
  3. Abstract:
  4. A Markov model is constructed for studying the counterparty risk in a CDS contract. The "wrong-way risk" in this model is accounted for by the possibility of the common default of the reference name and of the counterparty. A dynamic copula property as well as affine model specifications make pricing and calibration very efficient. We also consider the issue of dynamically hedging the CVA with a rolling CDS written on the counterparty. Numerical results are presented to show the adequacy of the behavior of CVA in the model with stylized features
  5. Keywords:
  6. CDS ; Counterparty credit risk ; CVA ; Dynamic hedging ; Wrong-way risk
  7. Source: International Journal of Theoretical and Applied Finance ; Volume 15, Issue 1 , February , 2012 ; 02190249 (ISSN)
  8. URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024911006498