The value of the ‘swap’ feature in equity default swaps
研究了股权违约互换（EDS）中“互换”特征的价值，推导出Black-Scholes假设下的定价公式，并量化了该特征对EDS价差的贡献，发现其经济显著性仅在高波动率、高触发水平和长期限时成立。
When equity default swap (EDS) contracts were first included in a rated collateralized debt obligation (CDO) deal, some critics doubted the originality of the product.In fact, EDSs are equivalent to already existing binary barrier options on equity, except the premium is not paid upfront, but over time, and conditional on the trigger event not having occurred.Therefore, as opposed to existing options, the buyer of an EDS: (1) postpones payment for protection, and (2) purchases not only protection against a sharp drop in the price of equity, but also the right to cease payments in case the barrier is hit.This paper derives the closed-form pricing formula for equity default swap spreads under the Black-Scholes assumptions, and then quantifies the fraction of the EDS spread actually due to the "swap" feature of the contract for plausible parameter values.It is found that the extra spread due to the swap nature of EDSs is economically significant only for high volatility, high trigger levels, and long time-to-maturity.The impact of interest rates on the value of the "swap" feature is almost exclusively due to the postponment of payments.