Credit Default Swaps

Credit Default Swaps are credit or entity derivatives that offer insurance in case of default of an underlying bond.
In this report a correlation analysis of CDS spread and the main asset classes is conducted. Furthermore, a discrete time variant of the Hull pricing model is implemented to obtain the historical default probabilities implied in the market prices of the CDS on four countries debt: Greece, Italy, Spain, and France.

The historical data is then implemented to build a forecast model based on a  Random Walk model. For each country we applied a Monte Carlo simulation to default probabilities and risk-free rates, obtaining a future distribution of the CDS spread.