PT  - JOURNAL ARTICLE
AU  - John C. Hull
AU  - Alan D White
TI  - Valuing Credit Default Swaps I
AID  - 10.3905/jod.2000.319115
DP  - 2000 Aug 31
TA  - The Journal of Derivatives
PG  - 29--40
VI  - 8
IP  - 1
4099  - https://pm-research.com/content/8/1/29.short
4100  - https://pm-research.com/content/8/1/29.full
AB  - 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.