This study analyzes the term structures of sovereign quanto credit default swap (CDS) spreads and currency options, which are driven by anticipated currency depreciation risk following sovereign credit default (Twin Ds). We develop consistent pricing models for these instruments using a jump-diffusion stochastic volatility model, which allows us to decompose the term structure into the risk components. We find a common risk factor between the intensity process of sovereign credit risk and the stochastic volatility of the exchange rate, and the depreciation risk mainly captures the dependence structure between these markets during periods of high market stress in the Eurozone countries. Depreciation risk is an important component of sovereign quanto CDS spreads and is evident in the negative slope of the volatility smile in the currency option market.

中文翻译：

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主权双币种信用违约掉期利差与货币期权之间的相互作用

本研究分析了主权信用违约掉期 (CDS) 利差和货币期权的期限结构，这些期限结构是由主权信用违约 (Twin Ds) 后预期货币贬值风险驱动的。我们使用跳跃扩散随机波动率模型为这些工具开发一致的定价模型，这使我们能够将期限结构分解为风险成分。我们发现，主权信用风险的强度过程与汇率的随机波动之间有一个共同的风险因素，而贬值风险主要体现了欧元区国家市场压力较大期间这些市场之间的依赖结构。贬值风险是主权货币 CDS 利差的重要组成部分，在货币期权市场波动率微笑的负斜率中表现得很明显。