Pricing of Total Return Swap

This paper discusses the pricing of total return swap which is one of the credit derivatives. As the total return swap contracts are exposed to both interest rate risk and default risk, this paper characterizes the interest rate risk through HJM model. Intensity model and hybrid model are used to characterize the default risk and to derive the corresponding pricing formula for two cases when the default time and interest rate are independent or correlated, respectively. Monte Carlo simulation method is used here to derive the numerical solution of the pricing problem.