Total return swap valuation with counterparty risk and interest rate risk. (English) Zbl 1406.91454

Summary: We study the pricing of total return swap (TRS) under the contagion models with counterparty risk and the interest rate risk. We assume that interest rate follows Heath-Jarrow-Morton (HJM) forward interest rate model and obtain the Libor market interest rate. The cases where default is related to the interest rate and independent of interest rate are considered. Using the methods of change of measure and the “total hazard construction”, the joint default probabilities are obtained. Furthermore, we obtain the closed-form formulas of TRS under different contagion models, respectively.


91G20 Derivative securities (option pricing, hedging, etc.)
91G30 Interest rates, asset pricing, etc. (stochastic models)
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