Discussion Paper Series 2006-E-13

Pricing of Credit Derivatives with the Asymptotic Expansion Approach

Yoshifumi Muroi

In this article, the prices of credit derivatives within multiple defaultable entities are evaluated using the asymptotic expansion approach. The theoretical prices of credit derivatives, such as credit default swaptions are often analytically intractable to get. However, recent developments in the asymptotic expansion method more easily enable the evaluation of these contingent claims. This article provides the prices of credit default swaps and swaptions taking account of counterparty credit risks. The validity of the asymptotic expansion method is also discussed.

Keywords: Defaultable bond, counterparty credit risk, credit default swap, swaption, asymptotic expansion method, basket swap, Malliavin calculus

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2006 Bank of Japan All Rights Reserved.

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