Study On The Pricing Modle Of The Interest Rate Swap Based On Two-side Default Risk

With the advance of theory's market-orienting, interest rate risk plays an increasingly important role in the risk management for enterprise. Whether in international or domestic interest rate market, the trend of interest rate in future has no trace to follow. The interest rate swap is the most effective method when those business and financial institutions avoid interest rate risk. The pricing of interest rate swap is an issue needing to study urgently.This paper is divided into four chapters. Chapter 1 is an introduction. Chapter 2 introduces the calculation model of default probability based on the geometric Brownian motion. Chapter 3 explains interest rate swap pricing model based on mutual default risk. Chapter 4 makes a reasonable test for interest rate swap pricing model with the conclusion as final chapter followed.The main work for paper:first, the default probability of both parties for transaction was introduced through the basic interest rate swap pricing model, to reflect the default risk of them. Second, it has made a comparison of the price of interest rate swaps corresponding to different default risk, and demonstrated the interest rate swap pricing model in line with the basic law of economics-"the higher their default risk, the higher its interest rate swap, and the lower the counterpart exchange rate, " Third, through geometric Brownian motion, characterizing asset value's variation with time of both parties to obtain the default probability which value of assets is less than the critical point of default.Main features and innovations:first, first, the default probability of both parties for transaction was introduced through the basic interest rate swap pricing model, to reflect the default risk of them and the basic law of economics of "the smaller default risk, the lower interest rate swap price ". Second, through geometric Brownian motion, characterizing asset value's variation with time of both parties to obtain the default probability which value of assets is less than the critical point of default and reflect the contrast between value of the assets and liabilities.. Third, it has made a comparison of the price of interest rate swaps corresponding to different default risk, and demonstrated the interest rate swap pricing model in line with the basic law of economics-"the higher their default risk, the higher its interest rate swap, and the lower the counterpart exchange rate".