2003•Xi'an Jiaotong Daxue xuebaoRequires access

An Analysis on Mechanism of Risk Hedge and Evaluation for Credit Default Swaps

Jin Chen

Abstract

Over recent years, one of the most important developments in theinternational financial market is the creation and explosive increase of thecredit deriving tool with the credit default swap as its main product. Based onthe analysis of the structure of the credit default swap, the paper delineates itsmechanism of hedging the credit risk and its market effect and gives eventuallythe evaluation method for the credit default swap based on the evaluation theoryof the option and the rate of the anticipatory breach of contract of KMV.

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Key concepts: Credit default swap, Credit default swap index, Credit derivative, iTraxx, Credit valuation adjustment, Interest rate swap, Credit risk, Swap (finance)