Credit default swaps baskets

The NX CR Engine is a pricing and risk management tool that allows users to model a wide range of credit derivative products. It produces theoretical prices for single-name credit default swaps, baskets and CDOs. In addition, NumeriX s software produces survival probabilities, recovery rates and correlations. 

The NX CR Engine also relies on multiple models, depending on the type of product being modeled. For example, it utilizes 1-dimensional models for valuing callable credit default swaps and uses more complicated models (such as quasi-multiperiod, diffusion multiperiod (Hull-White), Copula function, etc.) for baskets and CDOs. 

Limitations in analyzing complex products such as baskets of credit default swaps as the availability of historical data is limited. 

It overcomes the problems encountered when measuring the risk of a portfolio comprised of instruments nonlinearly dependent on the underlying factors (e.g., baskets of credit default swaps). 

The most common credit derivative, and possibly the simplest, is the credit default swap—also known as the credit or default swap. As diagrammed in FIGURE 10.4, it is a bilateral contract in which a protection seller, or guarantor, in return for a periodic fixed fee or a onetime premium agrees to pay the beneficiary counterparty in case any of a list of specified credit events occurs. The fee is usually quoted as a percentage of the nominal value of the reference asset or basket of assets. The swap term does not have to... 

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