Affiliations: Department of Mathematics, Tongji University, Shanghai 200092, China
Note: [] Address for correspondence: Jin Liang, Department of Mathematics, Tongji University, Shanghai 200092, China. E-mail: liang_jin2005@yahoo.com.cn
Abstract: The aim of this paper is to establish a tractable and flexible pricing model for Credit Contingent Interest Rate Swap (CCIRS), which is sensitive to interest rate and credit risk. Intensity-based approach is adopted to construct models for risk-free interest rate and default intensity. By using multi-factor Affine Jump Diffusion (AJD) process, a semi-close solution to the price of single-name CCIRS is derived. Further more, we put the counterparty risk into our pricing framework to compute the Credit Value Adjustment (CVA). Finally, numerical results and analysis have also been carried on.
