Valuing Credit Default Swaps I: No Counterparty Default Risk
April 2000
John Hull, and Alan White
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.
Subject: Investment/Derivatives, Valuation
Classification: Theoretical, Empirical
John Hull
Institution: Stern School of Business, New York University
Email: jhull@stern.nyu.edu
Telephone: (212) 998-0758
Home Page: http://www.stern.nyu.edu/~hull
Alan White
Institution: Joseph L. Rotman School of Management, University of Toronto
Email: awhite@rotman.utoronto.ca
Telephone: (416) 978 3689
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