RT Journal Article
SR Electronic
T1 Rating- and Firm Value-Based Valuation of Credit Swaps
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 52
OP 64
DO 10.3905/jfi.2001.319297
VO 11
IS 2
A1 Jason Z. Wei
YR 2001
UL https://pm-research.com/content/11/2/52.abstract
AB The author proposes a valuation framework for credit swaps that uses both rating transition information and firm value information. A mapping is used to convert the rating transition matrix to critical firm value boundaries, so that the valuation of a credit swap becomes valuation of a complex barrier option. The key advantage of this approach is its ability to differentiate reference assets belonging to the same rating category, which allows a more precise valuation. A numerical example shows that the degree of the swap premium or spread can vary widely for reference bonds in the same rating group if the issuing firms have different asset return volatilities.