Swap Pricing with Two-Sided Default Risk in a Rating-Based Model

This paper analyzes the pricing of defaultable securities in rating-based models where the default of more than one agent is involved. We extend the model of Duffie and Huang (1996) to a framework which explicitly takes into account the rating of each party. Our extension allows us to investigate the effects on swap spreads of early termination provisions, i.e., credit triggers, which are linked to the ratings of contracting parties.

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