Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization

Research Paper (undergraduate) from the year 2018 in the subject Business economics - Investment and Finance grade: 10 language: English abstract: This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words full collateralization cannot eliminate counterparty risk completely in the CDS market.