Pricing Of A Basket Of Credit Default Swaps Based On Markov Chain

A basket of credit default swaps(BDS)is an extension of credit default swaps(CDS).Those who want to profit from investments must take into account the risks brought by investments.In order to transfer such risks,investors will sell risks and become buyers of credit risks.They can also bundle risky companies to form basket-type derivatives.For these products,reasonable price is the key to solve the problem,so this paper mainly studies the reasonable pricing of BDS.There are two main methods for pricing credit derivatives,namely structured method and reduction method.However,both methods have their own drawbacks.Under the reduction method,the Markov model is improved.Markov model can describe the impact of credit rating changes on pricing.Therefore,this paper uses Markov model to price a basket of credit default swap contracts.Firstly,this paper assumes that the credit risk of counterparty is not considered,and only the first default is considered.Through the construction of Markov chain,a basket of credit default swap contracts without counterparty is priced and proved.Then,the credit risk of counterparty is considered.A basket of credit default swap contracts is priced.Finally,the transfer credit is priced separately.In order to reduce the supervision and management cost of commercial banks,two types of credit default swap contracts are designed and evaluated,which further confirms the practicability of a basket of credit default swap products.