Credit Default Swap Pricing In The Case Of Interest Rate Correlated With Default Rate

Credit default swaps are the most core products on the credit derivatives market, which plays a very important role in managing credit risk for financial institutions. Credit default swaps are financial innovations which used to hedge or transfer credit risk. However, due to excessive abuse of investors, making it become the financial tool which accelerate credit risk of infection in the financial crisis. Credit default swaps are a double edged sword on the financial products market. Only when reasonable use, it will play an very important role in credit risk fields.How credit default swap pricing is an important issue in the field of Credit derivatives. Assuming that interest rate and default rate evolve as correlated Hull-White process, the problem of pricing credit default swap was studied.Based on the reduced-form models, the problem of pricing credit default swap was studied. First, According to the properties of the conditional expectation, the pricing formula of CDS was given with no-arbitrage condition. Secondly, Assuming that interest rate and default rate evolve as correlated Hull-White process, By transforming Hull-White model into the HJM model and introducing a new probability measure, the analytical solution of CDS was obtained with the help of changing of measure. Finally, under the conditions of given parameters, we provided numerical solution of CDS with different correlation coefficients.