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Credit Default Swaps from an Equity Option View

  • Mathias Schmidt
Chapter
Part of the SpringerBriefs in Finance book series (BRIEFSFINANCE)

Abstract

We compare the implied probability of default on the credit market and on the equity market of the same underlying. In order to compare these two different markets, we use the price of premium leg of a CDS contract as the price for an American digital option. If called, this option pays the same amount as the protection seller (CDS) in a credit event. The applied volatility will be extracted from implied volatility surface. Via an optimization procedure we find the corresponding strike to the option price which we call “strike of default”. This number can be seen as a risk measure or an individual hedging limit for this underlying hence the markets assume a default at this share price with the maturity of the CDS.

Keywords

Stock Price Option Price Credit Default Swap Share Price Implied Volatility 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© The Author(s) 2016

Authors and Affiliations

  • Mathias Schmidt
    • 1
  1. 1.HamburgGermany

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