Pricing of Credit Default Swaps under Hybrid Model

The credit derivatives can solve the dilemma of the credit paradox that generally exists in our commercial banks. To carry out the instruments in china's banks, the priority we need to settle should be their prices. The paper concentrates on research of the pricing of the Credit default swaps (CDSs), which is the essential instrument of the credit derivatives. CDSs were usually priced separately under structure model or intensity model, but the two models have their disadvantages respectively. The article attempts to price the CDS under the hybrid model, which combine the two common pricing models. We take the structure model to determine the contingent payment of the counterparty of the CDS. We use the intensity model to determine the probability distribution of the default time of reference assets, accordingly to determine the total protection payment from the credit protection buyer. Under the arbitrage-free complete market, the contingent payment should be amount to the total protection payment. From the equation, we can deduce the swap premium formula of the CDS that the counterparty has default risk.