options on credit default swaps

bluefire666 · February 22nd, 2002, 9:36 pm

Hi all

I am starting a Masters paper on pricing options on credit default swaps. One of my focuses will be on determining appropriate volatility estimates to be used for option pricing.

Could anyone please point me to some sites or reading material that will give me some ideas as to the methodologies in relation to this pricing exercise.

Many thanks

reza · February 23rd, 2002, 5:33 pm

there are quite a few web-sites on the subject
one is Darrell Duffie's homepage
otherwise go to google and try credit default ...

bluefire666 · February 23rd, 2002, 6:23 pm

Thanks Reza. Have done that. But have not been able to find any info re. vol for credit default swaps. I was hoping www.creditex.com would have some info, but unfortunately none there either. Any ideas on where to look for vol info?

Pat · February 25th, 2002, 5:28 pm

Can't you back it out of bond options? The vol should be interest rate vol plus the spread vol ... the difference in price between options on the good stuff (AA) and pretty good stuff (BBB) should give the spread vols

bluefire666 · February 28th, 2002, 3:38 pm

Thanks Pat

My concern is that vols may differ given that CDS are more liquid than the bonds. Further, the current put skew in the CDS market may give me some strange results.

This option world is strange indeed!!

KO · March 1st, 2002, 6:24 pm

Well,

enroncredit.com

is no longer active. A good general site for credit risk is defaultrisk.com.

The first thing that comes to mind is a tree model. Branches for spot rates and branches for Default or No Default. Specify a process for default rates and a process for the default/hazard rate with few parameters. May need a spread process as well. I have no idea if there is enough CDS market data to "fix" the parameters. Hell, I don't know if this even makes sense.

bluefire666 · March 2nd, 2002, 9:57 am

hahhahahaha!! that's exactly how i feel sometimes. but the good news is that this topic is going to be the most talked about by the end of this year.