Pricing Model Of Currency Swap Under Two-side Default Risk

As an effective tool of averting risk,currency swap has demonstrated its trading and hedging ability around the world since 1980s.It involves foreign exchange market,money market and capital market,and can be used for both financing and international financial management.So far,currency swap has become a necessary tool of financing and risk management in the international financial market.However,all financial transactions bear risks.Currency swap itself will undergo risk while bringing benefits to users.That is what we must notice.As correct pricing of currency swap can generally prevent from systematic risk,so researchers pay more attention to pricing of currency swap under default risk.Current limited literatures considering default risk in pricing could not be used into practice because of the much complex models and unsupportable empirical evidence.Therefore,this paper studies pricing of currency swap under two-side default risk in terms of practicality and feasibility.We improved the no-risk forward contracts series model by using credit spread of Duffie and Huangs(1996) to price currency swap effectively and reasonably.And through case simulating analysis,we conclude that the model considering default risk is better than the one with no risk,for the result showed that the former can reflect different value of the principals from traders with different credit rank.