Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization

The research introduces a novel model for valuing credit default swap (CDS) contracts, emphasizing the influence of multiple credit risks from the buyer, seller, and reference entity. It highlights the significant impact of default dependency on asset pricing, identifying correlated default risk as a major concern in financial markets. Additionally, the findings reveal that fully collateralized CDS contracts do not equate to risk-free instruments, as full collateralization fails to completely mitigate counterparty risk within the CDS market.