The Research Of The Pricing Of Credit Default Swaps On Default Process For The Markov Chain

Credit default swaps is a new derivative for the last two decades, which is used to manage credit risk as a major tool. In 1998, International Swaps and Derivatives Association (ISDA) standardized credit default swap contracts, which promote this kind of financial derivatives transaction to flourish. According to the study of British Bankers Association in 2002, which shows that credit default swap accounted for more than half share in credit derivatives market. Therefore, the study of credit default swaps will help promote the introduction of credit derivatives transactions, and make full use of the role of credit risk transfer, which makes this new risk management tools to serve our financial markets as soon as possible.First, giving a brief introduction of credit default swaps, like background knowledge and characteristics of products and so on, and then introducing the system of the pricing models of credit default swap. At present, there are mainly two methods of credit risk:structured and simplification. Simplification is highly favored by most scholars. This paper describes the typical types of models:Hull and White model, Duffie model, Kijima model, JLT model and Duffie-Singleton model, and summarizes the pricing of credit default swaps on several key factors, primarily from interest rate, default probability and recovery.Secondly, using Kolmogorov forward equation equations to solve default probability, when the default process is in markov chain's case, and considering the default intensity and interest rates concerned and intercompany related breach be, by the extend form of Vasicek model, so as to obtain a interchangeable pricing method of credit default.Finally, China's first credit derivatives product, the emergence of the Chinese version of CDS, declared the era of derivative products in China. By this opportunity, we propose outlook and recommendations in application of credit default swaps in China.