After origination, changes in market interest rates and in the credit quality of the issuing entity, as well as the passage of time, typically change the market value of the credit swap. For a given credit swap with stated annuity rate U, one must then determine the current market value, which is not generally zero. When making markets, the first pricing problem is the more critical. When hedging or marking to market, the second problem is relevant. Methods for solving the two problems are similar. The second problem is generally the more challenging because off-market default swaps have less liquidity and because pricing references, such as bond spreads, are of relatively less use. This article.
