Landesbank Hessen-Thüringen Girozentrale is preparing to test a credit default swap pricing model developed by professors at Goethe University. Carsten Sausner, a financial mathematician at Helaba, said the model prices credit default swaps using parameters including Euribor, the 10-year swap rate and the price of the credit's corporate bonds. The bank plans to turn the raw equations into a calculator and then test it against market prices. After testing for three months, the bank will determine the effectiveness of the calculator. Han Lee, head of model development and quantitative pricing at Reech Capital in London, said there is no single model that the market uses to price credit default swaps. He said consensus is moving toward an intensity approach, where the price is calculated from market data, such as interest-rate swap spreads and credit default swap prices for other names. The alternative method, firm valuation, looks at the fundamentals of the credit.
Christian Schlag, professor of finance at Goethe University in Frankfurt, wrote the model. He declined comment on it.
