Arbitrage-Free Price Ranges for nth-to-Default Swaps

Topics:
Investment and Capital Markets
Tags:
Arbitrage,
Arbitrage Argument,
Financial Services
Source:
University of Toronto

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Overview: The arbitrage-free range of values of the loss leg of an nth-to-default swap, and the arbitrage-free range of premium payments for such a swap, are derived for homogeneous baskets of arbitrary numbers of reference entities. Elementary arbitrage arguments are given which show that arbitrage opportunities exist if the prices lie outside of the bounds, and analyses of both a discrete-time model and a continuous-time model show that all prices within the bounds are arbitrage-free.

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Format: PDF | Size: 137KB | Date: Nov 2004 | Pages: 11

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