Pricing Counterparty Credit Risk
We have analysed in the previous chapters the most straightforward ways of mitigating the risk of default of a counterparty, namely by imposing limits on transacted notional amounts and by negotiating collateral agreements with the counterparty.
A more flexible alternative is to buy protection or insurance on the given counterparty, typically in the form of a Credit Default Swap (CDS). In practice, however, risk mitigation via CDSs is not always straightforward.
KeywordsCredit Default Swap Credit Spread Hedging Strategy Credit Default Swap Spread Price Distribution
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