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Isaac Newton Institute for Mathematical Sciences

City Event "Credit"

The Pricing of Options on Individual CDS and on CDS Indices

26th February 2005

Author: Philipp J. Schoenbucher (ETH Zurich)

Abstract

While options on single-name CDS can be priced quite efficiently by using the "survival measure" to remove all explicit reference to the obligor's default risk, the pricing of options on CDS indices pose some new, interesting challenges to the credit risk modeller. Essentially, options on CDS indices require the formulation of a dynamic default dependency model on the whole underlying credit index. In this paper we discuss the possibility of pricing such options using frailty models of default dependency and furthermore analyse the extent to which survival-measure based techniques can be used to find approximate option prices.