  We study dynamic hedging of counterparty risk for a portfolio of credit
derivatives. Our empirically driven credit model consists of interacting
default intensities which ramp up and then decay after the occurrence of credit
events. Using the Galtchouk-Kunita-Watanabe decomposition of the counterparty
risk price payment stream, we recover a closed-form representation for the risk
minimizing strategy in terms of classical solutions to nonlinear recursive
systems of Cauchy problems. We discuss applications of our framework to the
most prominent class of credit derivatives, including credit swap and risky
bond portfolios, as well as first-to-default claims.
