Pricing and Valuation
There are two competing theories usually advanced for the pricing of credit default swaps. The first, referred to herein as the 'probability model', takes the present value of a series of cashflows weighted by their probability of non-default. This method suggests that credit default swaps should trade at a considerably lower spread than corporate bonds.
The second model, proposed by Darrell Duffie, but also by John Hull and White, uses a no-arbitrage approach.
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