Default Correlations within Credit Valuation

Abstract: This paper focuses on pricing of basket Credit Default Swaps. The credit market instruments such as CDSs and CDOs are introduced. The concepts of trading these derivatives in basket CDSs divided into tranches is also of big importance. Dierent pricing models are presented and compared. Those are Semi-Analytic Valuation model with a Copula approach used together with the methods compound and base correlation Also two contagion models are presented, one pure contagion and one contagion Copula mixture model. They are compared to each other to see how the prices dier for dierent tranches and premium payments. It is impossible to say which model prices right, but the main conclusion is that the prices dier. The models need to be further investigated in order to decide which one is the best for which purpose.