A note on replicating a CDS through a repo and an asset swap

Abstract

In this note we show how to replicate a stylized CDS with a repurchase agreement and an asset swap. The latter must be designed in such a way that, on default of the issuer, it is terminated with a zero close-out amount. This break clause can be priced using the well known unilateral credit/debit valuation adjustment formulas.

arXiv comment6 pages, 1 figure, working paper