| Since 1990 s,as a trading tool for transferring credit risk,credit derivatives have been rapidly developed and widely used in developed countries such as Europe and America.However,in the outbreak of the global financial crisis in 2008,the widespread use of credit derivatives didn't effectively alleviate and eliminate the credit risk but enlarge the credit risk.The reason for this phenomenon is mainly due to a serious underestimation of counterparty default risk,as well as the default correlation between counterparty and reference.In the financial crisis,about 2/3 of the loss is due to the credit valuation adjustment(CVA)risk caused by the market value of the loss,only about 1/3 of the loss is caused by the real default.The first is to deduce out the valuation adjustment formula for counterparty risk involved in over the counter(OTC)derivatives transactions.Then,deriving the price formula of CDS contract.At last,the price formula is applied to the credit risk adjustment formula of counterparty risk,and the formula of bilateral counterparty credit valuation adjustment of CDS contract is obtained.Firstly this paper describes the relevant theoretical knowledge,including arbitrage free pricing and risk neutral measure,counterparty risk and credit derivatives pricing model.In the assumption that the market is arbitrage free,and all cash flows can be discounted through risk-free interest rates to obtain the present value,both sides of the transaction have credit risk,Using the strength model,the adjustment formula of bilateral counterparty credit value is derived.Then,based on the transaction mechanism of CDS contract,deriving the price formula of CDS contract,and then the adjustment formula of counterparty credit value in CDS contract in general case is deduced,and several special cases are listed.Finally,as an example,we select the valuation formula of a case,and then calculate the result of the equation in detail on the premise that the parameters satisfy certain conditions. |
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