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risk. the input parameters are: the par rate of a set of overnight index swap, a set of
survival probabilities and the recovery rate of the issuer, the static data of the pool of
bonds. In order to price such a portfolio we introduce the following assumptions: SLIDE
CON LE ASSUMPTIONS: we assume that
The procedure to obtain the net present value of a single bond is the following: SLIDE
PROCEDURE; then, we iterate this procedure for the entire portfolio. FINISCE PRIMA
PARTE
Since we already have some NDPs, we interpolate them to get the Credit Curve which
will be used in discounting the cash flows, in order to consider the issuer risk. GRAFICO
CREDIT CURVE.
To obtain the discount factors needed to actualize the cashflows, we have to bootstrap
them from the OIS mkt quotes. GRAFICO DISCOUNT CURVE E CHI SI SENTE TEMERARIO
GLI PARLA DI COME SI FA IL BOOSTRAP: to obtain this discount curve we need to find
the discount factor that makes equal the legs of a swap contract; in particular we need
to find:
fixed and the floating leg:
compute the
Once we have obtained both the discount and the credit curves, we can compute the
bond net present value. DATI BOND. To do this we divide the bond in two cashflows:
one referring to the coupon part that is being receive and one referring to the cashflow
that will be received in case of default. Than we sum the two parts. RESULTS
As we can see the net present value is always less than the risk free net present value
reflecting the fact that we are willing to pay less for something that can default than
something that does not present this risk. as we can see, a longer maturity implies a
lower net present value. moreover,an higher recovery rate gives an higher npv
because is directly related to the default leg. Further, we are adding to the mkt to mkt
valuation, the leg related to the counterparty risk which was completely neglected
before. As we know the value of the defaultable part, we could try to find on the
market some contract that insures us against this loss, like a CDS.
Now imagine that we do not have the NDPs, but we have to extract them from CDS
mkt quotes. CDS DATA.
Notice that the CDS recovery is fixed at 0,40. PER CHI VOLESSE, BOOTSTRAP : In a noarbitrage model, the CDS spreads should make the present value of payments from
the buyer (fixed leg) equal to the present value of losses by the seller. We run the
procedure to find the root of the function in order to find the NDPs of the CDS. A credit
default swap has two legs: fixed leg and default leg.
1)Fixed Leg:
2)Default Leg:
4)Extract the NDP from the previous relation that makes the contract equal to zero,
and get the Credit Curve, that is, the set of the NDPs which will be used to discount
the cashflows. CREDIT CURVE AND RESULTS