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The Journal of Derivatives
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The Journal of Derivatives

The Journal of Derivatives

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Primary Article

Valuing Credit Default Swaps I

No Counterparty Default Risk

John C. Hull and Alan D White
The Journal of Derivatives Fall 2000, 8 (1) 29-40; DOI: https://doi.org/10.3905/jod.2000.319115
John C. Hull
A professor at the Joseph L. Rotman School of Management at the University of Toronto in Ontario, Canada.
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Alan D White
A professor at the Joseph L. Rotman School of Management at the University of Toronto.
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Abstract

One of the fastest growing areas of both derivatives trading and research right now is in contracts based on credit risk. The credit default swap is a standard instrument, offering the possibility of hedging against default by the issuer of an underlying bond. Several existing valuation methodologies differ in their assumptions about the payoff in case of a credit event. In this article, Hull and White present an approach based on the realistic assumption that the amount bondholders will claim in a default is based on the difference between the bond&’s post-default market value and its face value. An important contribution of this article is to use the term structure of risk-neutral implied default probabilities obtained from market prices for a set of bonds of the same issuer. The dependence of swap values on assumed recovery rates and the shape of the yield curve are explored.

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The Journal of Derivatives
Vol. 8, Issue 1
Fall 2000
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Valuing Credit Default Swaps I
John C. Hull, Alan D White
The Journal of Derivatives Aug 2000, 8 (1) 29-40; DOI: 10.3905/jod.2000.319115

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Valuing Credit Default Swaps I
John C. Hull, Alan D White
The Journal of Derivatives Aug 2000, 8 (1) 29-40; DOI: 10.3905/jod.2000.319115
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