PPT Slide
Valuation of swap with counter-party risk
• Interest rate swap with two periods remaining (one period = 1 year).
• Fixed-rate payer (belongs to credit class XYZ) is paying 6% per
• Floating-rate payer is considered default-free.
• The time 0 value of the two payments are
FLOAT(0, 1) = 1 - P0(0, 1)
FLOAT(0, 2) = P0(0, 1) - P0(0, 2).
• If default occurs, all future payment are null and void.
The payoff ratio conditional upon no default at time t - 1
If default has occurred at t - 1, then