The value of the 'swap' feature in equity default swaps

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Mostrar el registro sencillo del ítem Gil-Bazo, Javier 2010-03-25T09:51:53Z 2010-03-25T09:51:53Z 2006-02
dc.identifier.bibliographicCitation Quantitative Finance, 2006, 6, 1. p. 67-74
dc.identifier.issn 1469-7696
dc.description.abstract When equity default swap (EDS) contracts were first included in a rated collateralized debt obligation (CDO) deal, some critics doubted the originality of the product. In fact, EDSs are equivalent to already existing binary barrier options on equity, except the premium is not paid upfront, but over time, and conditional on the trigger event not having occurred. Therefore, as opposed to existing options, the buyer of an EDS: (1) postpones payment for protection, and (2) purchases not only protection against a sharp drop in the price of equity, but also the right to cease payments in case the barrier is hit. This paper derives the closed-form pricing formula for equity default swap spreads under the Black-Scholes assumptions, and then quantifies the fraction of the EDS spread actually due to the 'swap' feature of the contract for plausible parameter values. It is found that the extra spread due to the swap nature of EDSs is economically significant only for high volatility, high trigger levels, and long time-to-maturity. The impact of interest rates on the value of the 'swap' feature is almost exclusively due to the postponement of payments.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.publisher Taylor & Francis (Routledge)
dc.subject.other Applied mathematics
dc.subject.other Business mathematics
dc.subject.other Finance & accounting
dc.subject.other Financial mathematics
dc.title The value of the 'swap' feature in equity default swaps
dc.type article PeerReviewed
dc.description.status Publicado
dc.subject.eciencia Empresa
dc.identifier.doi 10.1080/14697680500467822
dc.rights.accessRights openAccess
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