We propose a new model for pricing Quanto CDS and risky bonds. The model operates with four stochastic factors, namely: hazard rate, foreign exchange rate, domestic interest rate, and foreign interest rate, and also allows for jumps-at-default in the FX and foreign interest rates. Corresponding systems of PDEs are deri…
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Modified model for Quanto CDS pricing with stochastic recovery and reduced complexity.
problem Modeling Quanto CDS with stochastic recovery and reduced complexity of interest rate.
method Modified Itkin, Shcherbakov, and Veygman (2019) model with RBF-FD method.
result Influence of recovery rate volatility and mean-reversion on Quanto CDS spread.
We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock written on a default-free dividend process, and a defaultable bond, whose prices are determined via equilibrium. We analyze fi…