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Jhammer
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Posts: 37
Joined: February 24th, 2014, 8:05 pm

Pricing of Contingent CDS

September 16th, 2015, 5:27 pm

Hi,Contingent CDS is a type of CDS, where the notional is the greater of zero and MtM value of the underlying derivative (usually some type of swap) at the time of default. This instrument is known as the prefect hedge for the counterparty CVA. Assuming there is no correlation between default of the counterparty and underlying of contingent CDS, how one should price a contingent CDS for a cross currency swap as the underlying?Is it possible to see this as a weighted portfolio of swaptions?Any input is much appreciated.
 
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amavtar
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Joined: July 28th, 2004, 11:19 am

Pricing of Contingent CDS

October 7th, 2015, 3:13 pm

it is possible to see it as weighted portfolio of swaptions, but there are no liquid cross currency swaptions, where would you get the vols from?
 
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Jhammer
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Posts: 37
Joined: February 24th, 2014, 8:05 pm

Pricing of Contingent CDS

October 13th, 2015, 7:52 pm

Yes, as you said, liquid volatilities do not exist for xxcy swaptions. There may be a way to model this as an exchange option and use Margrabe formula. This would imply lognormality assumption for the two swap legs.
Last edited by Jhammer on October 12th, 2015, 10:00 pm, edited 1 time in total.
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