[en] Currency total return swaps (CTRS) are hybrid derivatives instruments that allow to simultaneously hedge against credit and currency risks. We develop a structural credit risk model to evaluate CTRS premia. Empirical test on a sample of 23,005 price observations from 59 underlying issuers yields an average percentage error of around 10%. This indicates that, beyond interest rate risk, firm-specific factors are major drivers of the variations in the valuation of these instruments. Regression analysis of residuals shows that exchange rate determinants account for up to 40% of model pricing errors — indicating that a currency risk premium affects the CTRS price significantly but only marginally, which confirms the prevalence of credit risk in the pricing of CTRS.
Disciplines :
Finance
Author, co-author :
Cuchet, Romain; BRD - Groupe Société Générale
François, Pascal; HEC Montréal
Hübner, Georges ; Université de Liège - ULiège > HEC-Ecole de gestion : UER > Gestion financière
Language :
English
Title :
Currency Total Return Swaps: Valuation and Risk Factor Analysis
scite shows how a scientific paper has been cited by providing the context of the citation, a classification describing whether it supports, mentions, or contrasts the cited claim, and a label indicating in which section the citation was made.
Bibliography
Amin, KI and Jarrow, RA. 1991. Pricing foreign currency options under stochastic interest rates. J. Int. Money Finance, 10: 310 - 329.
Briys, E and Varenne, F. 1997. Valuing risky fixed rate debt: An extension. J. Financ. Quantit. Anal., 32: 239 - 248.
Carr, P and Wu, L. 2007. Theory and evidence on the dynamic interactions between sovereign credit default swaps and currency options. J. Bank. Finance, 31: 2383 - 2403.
Collin-Dufresne, P, Goldstein, RS and Martin, S. 2001. The determinants of credit spread changes. J. Finance, 56: 2177 - 2207.
Duan, J-C and Simonato, J-G. 1999. Estimating and testing exponential-Affine term structure models by Kalman filter. Rev. Quantit. Finance Account., 13: 111 - 135.
Duffee, GR. 1999. Estimating the price of default risk. Rev. Financ. Stud., 12: 197 - 226.
Ericsson, J, Jacobs, K and Oviedo, R. 2009. The determinants of credit default swap premia. J. Financ. Quantit. Anal., 44: 109 - 132.
Fan, J., Titman, S. and Twite, G., An international comparison of capital structure and debt maturity choices, 2010. Available online at SSRN: http://ssrn.com/abstract=423483
François, P and Hübner, G. 2004. Credit derivatives with multiple debt issues. J. Bank. Finance, 28: 997 - 1021.
Hamilton, D. and Varma, P., Default and recovery rates of corporate bond issuers, 1920-2005. Moody's Technical Report, 2006.
Skinner, F and Diaz, A. 2003. An empirical study of credit default swaps. J. Fixed Income, 13: 28 - 38.
Skinner, F and Townend, T. 2002. An empirical analysis of credit default swaps. Int. Rev. Financ. Anal., 11: 297 - 309.
Vasicek, O. 1977. An equilibrium characterization of the term structure. J. Financ. Econ., 5: 177 - 188.
Vassalou, M and Xing, Y. 2004. Default risk in equity returns. J. Finance, 59: 831 - 868.
Zhang, G., Yau, J. and Fung, H.-G., Do credit default swaps predict currency values? Appl. Financ. Econ. 2010, 20, 439-458.
Similar publications
Sorry the service is unavailable at the moment. Please try again later.
This website uses cookies to improve user experience. Read more
Save & Close
Accept all
Decline all
Show detailsHide details
Cookie declaration
About cookies
Strictly necessary
Performance
Strictly necessary cookies allow core website functionality such as user login and account management. The website cannot be used properly without strictly necessary cookies.
This cookie is used by Cookie-Script.com service to remember visitor cookie consent preferences. It is necessary for Cookie-Script.com cookie banner to work properly.
Performance cookies are used to see how visitors use the website, eg. analytics cookies. Those cookies cannot be used to directly identify a certain visitor.
Used to store the attribution information, the referrer initially used to visit the website
Cookies are small text files that are placed on your computer by websites that you visit. Websites use cookies to help users navigate efficiently and perform certain functions. Cookies that are required for the website to operate properly are allowed to be set without your permission. All other cookies need to be approved before they can be set in the browser.
You can change your consent to cookie usage at any time on our Privacy Policy page.