A Study on the Value and Risk Assessment of Swat Options in the Real Estate Market

In this paper, drives a pricing formula for a default swap option (DSO) that an investment bank in japanproduced on the credit-risk of a convertible bond (CB) issued by a third company C. In this DSO contract,a protection buyer A not only obtains a full hedge for the principal of the CB against a default of C butalso owns the option of starting an interest swap between the buyer and a protection seller B when a creditevent happens. This option gives A an opportunity to recover the interests from the CB as well. When Astarts the swap after a default, the floating rate is associated with the protection premium. After a certainsimplification, this paper makes a no-arbitrage valuation for the premium in a discrete time approach. Inaddition, when the credit quality of the parties A and B is taken into account in the valuation, a fair valueof the default swap option is also derived.