TY - JOUR T1 - Pricing Multiname Default Swaps with Counterparty Risk JF - The Journal of Fixed Income SP - 5 LP - 16 DO - 10.3905/jfi.2005.491108 VL - 14 IS - 4 AU - Roy Mashal AU - Marco Naldi Y1 - 2005/03/31 UR - https://pm-research.com/content/14/4/5.abstract N2 - This is a simple and general methodology for pricing counterparty risk in multiname default swaps without the problem of nested valuations, i.e., without having to compute the mark-to-market of the swap in each state where the counterparty defaults. Fair tranche spreads vary as functions of 1) the market-implied default probability of the risky counterparty, 2) the asymmetry of the mark-to-market recovery at default, and 3) dependence between the default time of the risky counterparty and the default times of the credits referenced by the swap. Allowing for the possibility of default of the protection seller has a much more significant impact on fair spreads than allowing for the possibility of default of the protection buyer, other things equal. ER -