credit support value for mg and paperco find below a spreadsheet with my very rough calculation of the value of
credit support for mg and paperco .
my approach is as follows :
1 . assume all contracts can be modelled as financial swaps .
2 . spread the notional trading volumes over the estimated swap tenors .
3 . calculate the value of defaulting at each period of the swap ( the
default option ) using black ' s formula .
4 . treat the value of the default options as risky cash flows . that is
treat this value just like you would an annuity stream . by discounting back
this stream of cash flows at the original risky rate and at the risk - reduced
rate , i find the value of credit enhancement as the difference in the two
npv ' s .
please give your comments , especially if this makes no sense to you .
stinson
credit support value for mg and paperco
find below a spreadsheet with my very rough calculation of the value of
credit support for mg and paperco .
my approach is as follows :
1 . assume all contracts can be modelled as financial swaps .
2 . spread the notional trading volumes over the estimated swap tenors .
3 . calculate the value of defaulting at each period of the swap ( the
default option ) using black ' s formula .
4 . treat the value of the default options as risky cash flows . that is
treat this value just like you would an annuity stream . by discounting back
this stream of cash flows at the original risky rate and at the risk - reduced
rate , i find the value of credit enhancement as the difference in the two
npv ' s .
please give your comments , especially if this makes no sense to you .
stinson