  This article presents a new model for valuing a credit default swap (CDS)
contract that is affected by multiple credit risks of the buyer, seller and
reference entity. We show that default dependency has a significant impact on
asset pricing. In fact, correlated default risk is one of the most pervasive
threats in financial markets. We also show that a fully collateralized CDS is
not equivalent to a risk-free one. In other words, full collateralization
cannot eliminate counterparty risk completely in the CDS market.
