SlideShare ist ein Scribd-Unternehmen logo
1 von 33
Downloaden Sie, um offline zu lesen
A Decade of CDO Pricing World Congress on Computational Finance Jon Gregory [email_address] March 26 th  2007 trant: Cover Option 2
Growth of Structured Credit Products Note: Notional excludes asset swaps Source: British Bankers Association Credit Derivatives Report 2006; Barclays Capital Credit Research 0 5 10 15 20 25 30 35 1996 1998 1999 2000 2001 2002 2003 2004 2006 2008E $ Trillion ,[object Object],Cash Flow Structured Finance CDOs Synthetic Balance Sheet CDOs; N th -to-Default Baskets Single Tranche CDOs; Managed CDOs; CDS Indices Bespoke Managed CDOs; Equity Default Swaps; Constant Maturity Default Swaps; Interest Rate Hybrids Options; Capital Structure Arbitrage; CDO 2 Synthetic Arbitrage CDOs Recovery Swaps; Dow Jones CDX/iTraxx Tranche Trades Leveraged super senior, CPPI and CPDO
Before the Correlation Market
The Gaussian Copula Model ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Manifestation of correlation risk Parallel gamma Idiosyncratic gamma Default
Gaussian Copula Model in Action Many sudden credit  events occurring early Several credit events Few credit events Hedging simulation of [3-6%] long protection position, delta hedged only
Model Risk : Choice of Copula ,[object Object],36 0.06 0.06 0.04 0.04 10 36 0.39 0.35 0.25 0.28 9 36 1.5 1.3 1.1 1.2 8 36 4.3 4.0 3.5 3.6 7 36 11 10 10 11 6 36 25 25 24 24 5 37 56 55 55 55 4 53 123 122 122 122 3 160 274 276 278 277 2 723 723 723 723 723 1 Marshall-Olkin Copula Clayton Copula Student-t copula (12 dof) Student-t copula (6 dof) Gaussian Copula Rank 10 names, spreads from 60 bps to 150 bps, recovery = 40%, maturity = 5 years, Gaussian correlation = 30%
Black Scholes compared to GCM ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Correlation Skew
[object Object],Standard Index Tranches The growth of the index market has led the development of liquid tranched credit markets DJ iTraxx Europe Super Senior 22-100% Equity 0-3% 3-6% 6-9% 125 equally weighted names 12-22% 9-12% Tranched DJ iTraxx Europe
A Traded Correlation Market Market GCM 24.00% 19.3% 82.5 234.7 26.5 82.0 14.0 32.9 8.75 6.99 3.53 0.05 ,[object Object],[object Object],[object Object],Super Senior 22-100% Equity 0-3% 3-6% 6-9% 12-22% 9-12%
Base Correlation
Base Correlation – Interpolation and Extrapolation [16-17%] tranchelet Base Correlation Curve “ Tranchelet” Premiums
Arbitrage-free Loss Interpolation ,[object Object],[object Object],[object Object],[object Object],[object Object]
Tranchelet Pricing – Some Extremes Maximum concavity, maximum dispersion, idiosyncratic risk 3 6 3 6 3 6 Tranche notional [0-3%] equity tranche    [0-1%], [1-2%] and [2-3%] tranchelets Minimum concavity, systemic risk effect 1,201 2-3% 1,201 1-2% 1,201 0-1% 61 2-3% 1,214 1-2% 3,090 0-1%
Pricing Tranchelets We know for example [0-3%] and [3-6%] Where would we price [0-1%], [1-2%], [2-3%], [3-4%], [4-5%] and [5-6%] ? ,[object Object],[object Object]
CDO Models
CDO Models ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Implied copula
Difficulty in fitting the market Implied Compound Correlation
The Toothpaste Tube Analogy Super Senior 22-100% Equity 0-3% 3-6% 6-9% Index [0-100%] 12-22% 9-12% Index = Sum of tranches [22-100%] = [0-100%] – [0-3%] – [3-6%] – [6-9%] – [9-12%] – [12-22%]
The Toothpaste Tube Analogy (II) ,[object Object],[object Object],[22-100%] > [12-22%] [22-100%] = 0
Fitting the Market - Summary ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Bespoke Tranches – Normalisation Methods If the portfolio is more risky then an equivalent tranche is more risky How to we adjust the correlation curve we use to account for this? Index portfolio Bespoke portfolio Expected loss Tranche
Bespoke Tranches – Normalisation Methods (II)
Structural Models Lead only one way ,[object Object],[object Object],[object Object]
The Future
Index Correlation – off the run tranches Index rolls give us more maturity information detach maturity correlation CDX.5 CDX.6 CDX.7 CDX.8 CDX.5 CDX.6 CDX.7 CDX.8 CDX.5 CDX.6 CDX.7 CDX.8 5Y 7Y 10Y “ Base Correlation”  Surface CDX.4 CDX.4 CDX.4
Index Correlation – HY/IG Different indices may provide complimentary information [15-30%] [25-35%] [10-15%] [15-25%] [7-10%] [10-15%] [3-7%] [0-10%] [0-3%] CDX HY CDX IG
Index Correlation – HY/IG (II) Test out your pricing method 3% 7% 10% 15% 30% IG HY 3% 35% 25% 15% 10% IG HY
Index Correlation – HY/IG (III) Obvious implications for Barbell portfolios [15-30%] [25-35%] [10-15%] [15-25%] [7-10%] [10-15%] [3-7%] [0-10%] [0-3%] CDX HY CDX IG
Bespoke CDO Pricing ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],iTraxx.6 5Y iTraxx.6 7Y iTraxx.6 10Y iTraxx.5 5Y iTraxx.5 7Y iTraxx.5 10Y HY tranches XO tranches Bespokes spread Maturity MODEL
Product Development  ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Payoff sensitive to credit spread distributions aswell as default times Payoffs only depend on default times Large area of interest tackling these exotic CDOs Now we need a model based approach that can characterise maturity term structure Stochastic Intensity and Dynamic Loss Models Base correlation, implied copula approach
The Challenges and Solutions Tranchelet pricing Bespoke Pricing Forward Starting Loss Surface Construction Tranche Options Enhanced Base Correlation Methods Implied Copula Approach Stochastic Intensity Models Dynamic Loss Models There is no one to one mapping in the above    Tranche options pricing may be very sensitive to tranchelet pricing “ Exotic” CDOs
Disclaimer ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],trant: Note to Production Team Don’t forget to enter EU number EUXXX

Weitere ähnliche Inhalte

Was ist angesagt?

Financial Concepts Risk Return PowerPoint Presentation Slides
Financial Concepts Risk Return PowerPoint Presentation SlidesFinancial Concepts Risk Return PowerPoint Presentation Slides
Financial Concepts Risk Return PowerPoint Presentation SlidesSlideTeam
 
Concepts on Beta, Valuation and Diversification v6
Concepts on Beta, Valuation and Diversification v6Concepts on Beta, Valuation and Diversification v6
Concepts on Beta, Valuation and Diversification v6Lin Giralt
 
Bba 2204 fin mgt week 8 risk and return
Bba 2204 fin mgt week 8 risk and returnBba 2204 fin mgt week 8 risk and return
Bba 2204 fin mgt week 8 risk and returnStephen Ong
 
Finance lecture risk and return
Finance lecture   risk and returnFinance lecture   risk and return
Finance lecture risk and returnbradhapa
 
Chapter7 an introduction to risk and return
Chapter7 an introduction to risk and returnChapter7 an introduction to risk and return
Chapter7 an introduction to risk and returnRodel Falculan
 
Investing Concept Of Risk And Return PowerPoint Presentation Slides
Investing Concept Of Risk And Return PowerPoint Presentation Slides Investing Concept Of Risk And Return PowerPoint Presentation Slides
Investing Concept Of Risk And Return PowerPoint Presentation Slides SlideTeam
 
Risk Return Trade Off PowerPoint Presentation Slides
Risk Return Trade Off PowerPoint Presentation SlidesRisk Return Trade Off PowerPoint Presentation Slides
Risk Return Trade Off PowerPoint Presentation SlidesSlideTeam
 
Marginal Efficiency Of Investment(Mei) Revised Feb 2011
Marginal Efficiency Of Investment(Mei) Revised Feb 2011Marginal Efficiency Of Investment(Mei) Revised Feb 2011
Marginal Efficiency Of Investment(Mei) Revised Feb 2011Gary Crosbie
 

Was ist angesagt? (10)

Financial Concepts Risk Return PowerPoint Presentation Slides
Financial Concepts Risk Return PowerPoint Presentation SlidesFinancial Concepts Risk Return PowerPoint Presentation Slides
Financial Concepts Risk Return PowerPoint Presentation Slides
 
Concepts on Beta, Valuation and Diversification v6
Concepts on Beta, Valuation and Diversification v6Concepts on Beta, Valuation and Diversification v6
Concepts on Beta, Valuation and Diversification v6
 
Bba 2204 fin mgt week 8 risk and return
Bba 2204 fin mgt week 8 risk and returnBba 2204 fin mgt week 8 risk and return
Bba 2204 fin mgt week 8 risk and return
 
Class 16 fin_mgmnt_slides_jmm2014p
Class 16 fin_mgmnt_slides_jmm2014pClass 16 fin_mgmnt_slides_jmm2014p
Class 16 fin_mgmnt_slides_jmm2014p
 
Finance lecture risk and return
Finance lecture   risk and returnFinance lecture   risk and return
Finance lecture risk and return
 
Chapter7 an introduction to risk and return
Chapter7 an introduction to risk and returnChapter7 an introduction to risk and return
Chapter7 an introduction to risk and return
 
Investing Concept Of Risk And Return PowerPoint Presentation Slides
Investing Concept Of Risk And Return PowerPoint Presentation Slides Investing Concept Of Risk And Return PowerPoint Presentation Slides
Investing Concept Of Risk And Return PowerPoint Presentation Slides
 
Smart Beta Infographic
Smart Beta InfographicSmart Beta Infographic
Smart Beta Infographic
 
Risk Return Trade Off PowerPoint Presentation Slides
Risk Return Trade Off PowerPoint Presentation SlidesRisk Return Trade Off PowerPoint Presentation Slides
Risk Return Trade Off PowerPoint Presentation Slides
 
Marginal Efficiency Of Investment(Mei) Revised Feb 2011
Marginal Efficiency Of Investment(Mei) Revised Feb 2011Marginal Efficiency Of Investment(Mei) Revised Feb 2011
Marginal Efficiency Of Investment(Mei) Revised Feb 2011
 

Andere mochten auch

CDS/CDOs and the Gaussian Copula Formula
CDS/CDOs and the Gaussian Copula FormulaCDS/CDOs and the Gaussian Copula Formula
CDS/CDOs and the Gaussian Copula Formulakkoenen
 
CDO-Squared Demystified
CDO-Squared DemystifiedCDO-Squared Demystified
CDO-Squared Demystifiedfinancedude
 
Bihar Special Purpose Vehicle
Bihar Special Purpose Vehicle Bihar Special Purpose Vehicle
Bihar Special Purpose Vehicle financedude
 
Bank Licensing Supplement Doc
Bank Licensing Supplement DocBank Licensing Supplement Doc
Bank Licensing Supplement Docfinancedude
 
Special Purpose Vehicles in Jersey
Special Purpose Vehicles in JerseySpecial Purpose Vehicles in Jersey
Special Purpose Vehicles in Jerseyfinancedude
 
Electronic Documentation for SPV
Electronic Documentation for SPVElectronic Documentation for SPV
Electronic Documentation for SPVfinancedude
 
Final Written Notice
Final Written NoticeFinal Written Notice
Final Written Noticefinancedude
 
Development of Special-Purpose Vehiclas
Development of Special-Purpose VehiclasDevelopment of Special-Purpose Vehiclas
Development of Special-Purpose Vehiclasfinancedude
 
Circular of the State Administration of Foreign Exchange
Circular of the State Administration of Foreign ExchangeCircular of the State Administration of Foreign Exchange
Circular of the State Administration of Foreign Exchangefinancedude
 
Detailed Product Development
Detailed Product DevelopmentDetailed Product Development
Detailed Product Developmentfinancedude
 
How Resilient are MBS to CDO Market Disruptions
How Resilient are MBS to CDO Market DisruptionsHow Resilient are MBS to CDO Market Disruptions
How Resilient are MBS to CDO Market Disruptionsfinancedude
 
CDOs in plain english
CDOs in plain englishCDOs in plain english
CDOs in plain englishfinancedude
 
MBIA's CDO Strategy
MBIA's CDO StrategyMBIA's CDO Strategy
MBIA's CDO Strategyfinancedude
 
Implementing rules for SPVs
Implementing rules for SPVsImplementing rules for SPVs
Implementing rules for SPVsfinancedude
 
Role of special purpose vehicles is ABS market
Role of special purpose vehicles is ABS marketRole of special purpose vehicles is ABS market
Role of special purpose vehicles is ABS marketfinancedude
 
CDO: Collateralized Debt Obligation
CDO: Collateralized Debt ObligationCDO: Collateralized Debt Obligation
CDO: Collateralized Debt Obligationfinancedude
 

Andere mochten auch (17)

CDS/CDOs and the Gaussian Copula Formula
CDS/CDOs and the Gaussian Copula FormulaCDS/CDOs and the Gaussian Copula Formula
CDS/CDOs and the Gaussian Copula Formula
 
CDO-Squared Demystified
CDO-Squared DemystifiedCDO-Squared Demystified
CDO-Squared Demystified
 
Bihar Special Purpose Vehicle
Bihar Special Purpose Vehicle Bihar Special Purpose Vehicle
Bihar Special Purpose Vehicle
 
Bank Licensing Supplement Doc
Bank Licensing Supplement DocBank Licensing Supplement Doc
Bank Licensing Supplement Doc
 
Special Purpose Vehicles in Jersey
Special Purpose Vehicles in JerseySpecial Purpose Vehicles in Jersey
Special Purpose Vehicles in Jersey
 
Electronic Documentation for SPV
Electronic Documentation for SPVElectronic Documentation for SPV
Electronic Documentation for SPV
 
Final Written Notice
Final Written NoticeFinal Written Notice
Final Written Notice
 
Development of Special-Purpose Vehiclas
Development of Special-Purpose VehiclasDevelopment of Special-Purpose Vehiclas
Development of Special-Purpose Vehiclas
 
Circular of the State Administration of Foreign Exchange
Circular of the State Administration of Foreign ExchangeCircular of the State Administration of Foreign Exchange
Circular of the State Administration of Foreign Exchange
 
Detailed Product Development
Detailed Product DevelopmentDetailed Product Development
Detailed Product Development
 
How Resilient are MBS to CDO Market Disruptions
How Resilient are MBS to CDO Market DisruptionsHow Resilient are MBS to CDO Market Disruptions
How Resilient are MBS to CDO Market Disruptions
 
CDOs in plain english
CDOs in plain englishCDOs in plain english
CDOs in plain english
 
MBIA's CDO Strategy
MBIA's CDO StrategyMBIA's CDO Strategy
MBIA's CDO Strategy
 
Implementing rules for SPVs
Implementing rules for SPVsImplementing rules for SPVs
Implementing rules for SPVs
 
Securitization
SecuritizationSecuritization
Securitization
 
Role of special purpose vehicles is ABS market
Role of special purpose vehicles is ABS marketRole of special purpose vehicles is ABS market
Role of special purpose vehicles is ABS market
 
CDO: Collateralized Debt Obligation
CDO: Collateralized Debt ObligationCDO: Collateralized Debt Obligation
CDO: Collateralized Debt Obligation
 

Ähnlich wie A decade of CDO pricing

EAD Parameter : A stochastic way to model the Credit Conversion Factor
EAD Parameter : A stochastic way to model the Credit Conversion FactorEAD Parameter : A stochastic way to model the Credit Conversion Factor
EAD Parameter : A stochastic way to model the Credit Conversion FactorGenest Benoit
 
Risky business: Guide to Risk Management
Risky business: Guide to Risk ManagementRisky business: Guide to Risk Management
Risky business: Guide to Risk ManagementMichael Le
 
Credit-Implied Volatility
Credit-Implied VolatilityCredit-Implied Volatility
Credit-Implied VolatilityTwo Sigma
 
Chapter11 projectriskanalysis
Chapter11 projectriskanalysisChapter11 projectriskanalysis
Chapter11 projectriskanalysisAKSHAYA0000
 
Giovanni Calice. Spillovers in Sovereign Bond and CDS Markets: An Analysis of...
Giovanni Calice. Spillovers in Sovereign Bond and CDS Markets: An Analysis of...Giovanni Calice. Spillovers in Sovereign Bond and CDS Markets: An Analysis of...
Giovanni Calice. Spillovers in Sovereign Bond and CDS Markets: An Analysis of...Eesti Pank
 
Portfolio analysis and cash flows
Portfolio analysis and cash flowsPortfolio analysis and cash flows
Portfolio analysis and cash flowsGerry Gatawa
 
Equity Option Trading : Derivatives Market Practices
Equity Option Trading : Derivatives Market PracticesEquity Option Trading : Derivatives Market Practices
Equity Option Trading : Derivatives Market PracticesJames Prichard
 
Financial Risk Mgt - Lec 3 by Dr. Syed Muhammad Ali Tirmizi
Financial Risk Mgt - Lec 3 by Dr. Syed Muhammad Ali TirmiziFinancial Risk Mgt - Lec 3 by Dr. Syed Muhammad Ali Tirmizi
Financial Risk Mgt - Lec 3 by Dr. Syed Muhammad Ali TirmiziDr. Muhammad Ali Tirmizi., Ph.D.
 
Three Novel Factors Affecting Hedge Fund Returns_CDMC (May 2016)
Three Novel Factors Affecting Hedge Fund Returns_CDMC (May 2016)Three Novel Factors Affecting Hedge Fund Returns_CDMC (May 2016)
Three Novel Factors Affecting Hedge Fund Returns_CDMC (May 2016)FARROKH EMAMI L.
 
Types of risk
Types of riskTypes of risk
Types of riskImran
 
Crocs, Inc. Case Study Report Essay
Crocs, Inc. Case Study Report EssayCrocs, Inc. Case Study Report Essay
Crocs, Inc. Case Study Report EssayKristi Lucas
 
Collateralisation: CVA & FVA - Murex - Alexandre Bon
Collateralisation: CVA & FVA - Murex - Alexandre BonCollateralisation: CVA & FVA - Murex - Alexandre Bon
Collateralisation: CVA & FVA - Murex - Alexandre BonAlexandre Bon
 
Maintaining Credit Quality in Banks and Credit Unions
Maintaining Credit Quality in Banks and Credit UnionsMaintaining Credit Quality in Banks and Credit Unions
Maintaining Credit Quality in Banks and Credit UnionsLibby Bierman
 
The Asset Return - Funding Cost Paradox: The Case for LDI
The Asset Return - Funding Cost Paradox: The Case for LDIThe Asset Return - Funding Cost Paradox: The Case for LDI
The Asset Return - Funding Cost Paradox: The Case for LDINorman Ehrentreich
 
BCG-Executive-Perspectives-CEOs-Dilemma-Supply-Chain-Resilience.pdf
BCG-Executive-Perspectives-CEOs-Dilemma-Supply-Chain-Resilience.pdfBCG-Executive-Perspectives-CEOs-Dilemma-Supply-Chain-Resilience.pdf
BCG-Executive-Perspectives-CEOs-Dilemma-Supply-Chain-Resilience.pdfRobertoChiesa6
 
[EN] The use of convertible bonds in the asset allocation process
[EN] The use of convertible bonds in the asset allocation process[EN] The use of convertible bonds in the asset allocation process
[EN] The use of convertible bonds in the asset allocation processNN Investment Partners
 

Ähnlich wie A decade of CDO pricing (20)

EAD Parameter : A stochastic way to model the Credit Conversion Factor
EAD Parameter : A stochastic way to model the Credit Conversion FactorEAD Parameter : A stochastic way to model the Credit Conversion Factor
EAD Parameter : A stochastic way to model the Credit Conversion Factor
 
Risky business: Guide to Risk Management
Risky business: Guide to Risk ManagementRisky business: Guide to Risk Management
Risky business: Guide to Risk Management
 
Credit-Implied Volatility
Credit-Implied VolatilityCredit-Implied Volatility
Credit-Implied Volatility
 
Chapter11 projectriskanalysis
Chapter11 projectriskanalysisChapter11 projectriskanalysis
Chapter11 projectriskanalysis
 
Giovanni Calice. Spillovers in Sovereign Bond and CDS Markets: An Analysis of...
Giovanni Calice. Spillovers in Sovereign Bond and CDS Markets: An Analysis of...Giovanni Calice. Spillovers in Sovereign Bond and CDS Markets: An Analysis of...
Giovanni Calice. Spillovers in Sovereign Bond and CDS Markets: An Analysis of...
 
Portfolio analysis and cash flows
Portfolio analysis and cash flowsPortfolio analysis and cash flows
Portfolio analysis and cash flows
 
Equity Option Trading : Derivatives Market Practices
Equity Option Trading : Derivatives Market PracticesEquity Option Trading : Derivatives Market Practices
Equity Option Trading : Derivatives Market Practices
 
Financial Risk Mgt - Lec 3 by Dr. Syed Muhammad Ali Tirmizi
Financial Risk Mgt - Lec 3 by Dr. Syed Muhammad Ali TirmiziFinancial Risk Mgt - Lec 3 by Dr. Syed Muhammad Ali Tirmizi
Financial Risk Mgt - Lec 3 by Dr. Syed Muhammad Ali Tirmizi
 
Lgd Model Jacobs 10 10 V2[1]
Lgd Model Jacobs 10 10 V2[1]Lgd Model Jacobs 10 10 V2[1]
Lgd Model Jacobs 10 10 V2[1]
 
Risk Ana
Risk AnaRisk Ana
Risk Ana
 
Three Novel Factors Affecting Hedge Fund Returns_CDMC (May 2016)
Three Novel Factors Affecting Hedge Fund Returns_CDMC (May 2016)Three Novel Factors Affecting Hedge Fund Returns_CDMC (May 2016)
Three Novel Factors Affecting Hedge Fund Returns_CDMC (May 2016)
 
eltonpickford-data
eltonpickford-dataeltonpickford-data
eltonpickford-data
 
Types of risk
Types of riskTypes of risk
Types of risk
 
Crocs, Inc. Case Study Report Essay
Crocs, Inc. Case Study Report EssayCrocs, Inc. Case Study Report Essay
Crocs, Inc. Case Study Report Essay
 
Collateralisation: CVA & FVA - Murex - Alexandre Bon
Collateralisation: CVA & FVA - Murex - Alexandre BonCollateralisation: CVA & FVA - Murex - Alexandre Bon
Collateralisation: CVA & FVA - Murex - Alexandre Bon
 
Maintaining Credit Quality in Banks and Credit Unions
Maintaining Credit Quality in Banks and Credit UnionsMaintaining Credit Quality in Banks and Credit Unions
Maintaining Credit Quality in Banks and Credit Unions
 
The Asset Return - Funding Cost Paradox: The Case for LDI
The Asset Return - Funding Cost Paradox: The Case for LDIThe Asset Return - Funding Cost Paradox: The Case for LDI
The Asset Return - Funding Cost Paradox: The Case for LDI
 
risk.ppt
risk.pptrisk.ppt
risk.ppt
 
BCG-Executive-Perspectives-CEOs-Dilemma-Supply-Chain-Resilience.pdf
BCG-Executive-Perspectives-CEOs-Dilemma-Supply-Chain-Resilience.pdfBCG-Executive-Perspectives-CEOs-Dilemma-Supply-Chain-Resilience.pdf
BCG-Executive-Perspectives-CEOs-Dilemma-Supply-Chain-Resilience.pdf
 
[EN] The use of convertible bonds in the asset allocation process
[EN] The use of convertible bonds in the asset allocation process[EN] The use of convertible bonds in the asset allocation process
[EN] The use of convertible bonds in the asset allocation process
 

Mehr von financedude

Asset Securitization and Insolvency
Asset Securitization and InsolvencyAsset Securitization and Insolvency
Asset Securitization and Insolvencyfinancedude
 
Stamp Duty Land Tax
Stamp Duty Land TaxStamp Duty Land Tax
Stamp Duty Land Taxfinancedude
 
Italian-Thai development publc company limited
Italian-Thai development publc company limitedItalian-Thai development publc company limited
Italian-Thai development publc company limitedfinancedude
 
Special Purpose Vehicles and Insolvency Reforms in Philipeans
Special Purpose Vehicles and Insolvency Reforms in PhilipeansSpecial Purpose Vehicles and Insolvency Reforms in Philipeans
Special Purpose Vehicles and Insolvency Reforms in Philipeansfinancedude
 
Luxor Group Special Purpose Vehicle
Luxor Group Special Purpose VehicleLuxor Group Special Purpose Vehicle
Luxor Group Special Purpose Vehiclefinancedude
 
Islamic Project Finance in Saudi Arabia
Islamic Project Finance in Saudi ArabiaIslamic Project Finance in Saudi Arabia
Islamic Project Finance in Saudi Arabiafinancedude
 
Securites and Exchange Commission of Pakistan
Securites and Exchange Commission of PakistanSecurites and Exchange Commission of Pakistan
Securites and Exchange Commission of Pakistanfinancedude
 
Chapter 7: Special Purpose Vehicle
Chapter 7: Special Purpose VehicleChapter 7: Special Purpose Vehicle
Chapter 7: Special Purpose Vehiclefinancedude
 
The Protected Cell Companies
The Protected Cell CompaniesThe Protected Cell Companies
The Protected Cell Companiesfinancedude
 
Securitization: Establishing a Special Purpose Vehicle in Guernsey
Securitization: Establishing a Special Purpose Vehicle in GuernseySecuritization: Establishing a Special Purpose Vehicle in Guernsey
Securitization: Establishing a Special Purpose Vehicle in Guernseyfinancedude
 
Structured Finance: Use and Abuse of Special-Purpose Entities
Structured Finance: Use and Abuse of Special-Purpose EntitiesStructured Finance: Use and Abuse of Special-Purpose Entities
Structured Finance: Use and Abuse of Special-Purpose Entitiesfinancedude
 
Enron, JPMorgan, and Offshore Special Purpose Vehicles
Enron, JPMorgan, and Offshore Special Purpose VehiclesEnron, JPMorgan, and Offshore Special Purpose Vehicles
Enron, JPMorgan, and Offshore Special Purpose Vehiclesfinancedude
 
Expression of Interest for Formation of Joint Venture Company
Expression of Interest for Formation of Joint Venture CompanyExpression of Interest for Formation of Joint Venture Company
Expression of Interest for Formation of Joint Venture Companyfinancedude
 
Special Purpose Vehicle
Special Purpose VehicleSpecial Purpose Vehicle
Special Purpose Vehiclefinancedude
 
Special Purpose Entities in the Public Sector
Special Purpose Entities in the Public SectorSpecial Purpose Entities in the Public Sector
Special Purpose Entities in the Public Sectorfinancedude
 
Special Purpose Vehicals Securitization
Special Purpose Vehicals SecuritizationSpecial Purpose Vehicals Securitization
Special Purpose Vehicals Securitizationfinancedude
 
Copula-Based Model for the Term Structure of CDO Tranches
Copula-Based Model for the Term Structure of CDO TranchesCopula-Based Model for the Term Structure of CDO Tranches
Copula-Based Model for the Term Structure of CDO Tranchesfinancedude
 
CDO: Collateralized Debt Obligation
CDO: Collateralized Debt ObligationCDO: Collateralized Debt Obligation
CDO: Collateralized Debt Obligationfinancedude
 

Mehr von financedude (18)

Asset Securitization and Insolvency
Asset Securitization and InsolvencyAsset Securitization and Insolvency
Asset Securitization and Insolvency
 
Stamp Duty Land Tax
Stamp Duty Land TaxStamp Duty Land Tax
Stamp Duty Land Tax
 
Italian-Thai development publc company limited
Italian-Thai development publc company limitedItalian-Thai development publc company limited
Italian-Thai development publc company limited
 
Special Purpose Vehicles and Insolvency Reforms in Philipeans
Special Purpose Vehicles and Insolvency Reforms in PhilipeansSpecial Purpose Vehicles and Insolvency Reforms in Philipeans
Special Purpose Vehicles and Insolvency Reforms in Philipeans
 
Luxor Group Special Purpose Vehicle
Luxor Group Special Purpose VehicleLuxor Group Special Purpose Vehicle
Luxor Group Special Purpose Vehicle
 
Islamic Project Finance in Saudi Arabia
Islamic Project Finance in Saudi ArabiaIslamic Project Finance in Saudi Arabia
Islamic Project Finance in Saudi Arabia
 
Securites and Exchange Commission of Pakistan
Securites and Exchange Commission of PakistanSecurites and Exchange Commission of Pakistan
Securites and Exchange Commission of Pakistan
 
Chapter 7: Special Purpose Vehicle
Chapter 7: Special Purpose VehicleChapter 7: Special Purpose Vehicle
Chapter 7: Special Purpose Vehicle
 
The Protected Cell Companies
The Protected Cell CompaniesThe Protected Cell Companies
The Protected Cell Companies
 
Securitization: Establishing a Special Purpose Vehicle in Guernsey
Securitization: Establishing a Special Purpose Vehicle in GuernseySecuritization: Establishing a Special Purpose Vehicle in Guernsey
Securitization: Establishing a Special Purpose Vehicle in Guernsey
 
Structured Finance: Use and Abuse of Special-Purpose Entities
Structured Finance: Use and Abuse of Special-Purpose EntitiesStructured Finance: Use and Abuse of Special-Purpose Entities
Structured Finance: Use and Abuse of Special-Purpose Entities
 
Enron, JPMorgan, and Offshore Special Purpose Vehicles
Enron, JPMorgan, and Offshore Special Purpose VehiclesEnron, JPMorgan, and Offshore Special Purpose Vehicles
Enron, JPMorgan, and Offshore Special Purpose Vehicles
 
Expression of Interest for Formation of Joint Venture Company
Expression of Interest for Formation of Joint Venture CompanyExpression of Interest for Formation of Joint Venture Company
Expression of Interest for Formation of Joint Venture Company
 
Special Purpose Vehicle
Special Purpose VehicleSpecial Purpose Vehicle
Special Purpose Vehicle
 
Special Purpose Entities in the Public Sector
Special Purpose Entities in the Public SectorSpecial Purpose Entities in the Public Sector
Special Purpose Entities in the Public Sector
 
Special Purpose Vehicals Securitization
Special Purpose Vehicals SecuritizationSpecial Purpose Vehicals Securitization
Special Purpose Vehicals Securitization
 
Copula-Based Model for the Term Structure of CDO Tranches
Copula-Based Model for the Term Structure of CDO TranchesCopula-Based Model for the Term Structure of CDO Tranches
Copula-Based Model for the Term Structure of CDO Tranches
 
CDO: Collateralized Debt Obligation
CDO: Collateralized Debt ObligationCDO: Collateralized Debt Obligation
CDO: Collateralized Debt Obligation
 

Kürzlich hochgeladen

Live-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarLive-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarNathanielSchmuck
 
Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..dlewis191
 
Harvard Business Review.pptx | Navigating Labor Unrest (March-April 2024)
Harvard Business Review.pptx | Navigating Labor Unrest (March-April 2024)Harvard Business Review.pptx | Navigating Labor Unrest (March-April 2024)
Harvard Business Review.pptx | Navigating Labor Unrest (March-April 2024)tazeenaila12
 
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...AustraliaChapterIIBA
 
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfPDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfHajeJanKamps
 
Trauma Training Service for First Responders
Trauma Training Service for First RespondersTrauma Training Service for First Responders
Trauma Training Service for First RespondersBPOQe
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGlokeshwarmaha
 
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfTalent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfCharles Cotter, PhD
 
Data skills for Agile Teams- Killing story points
Data skills for Agile Teams- Killing story pointsData skills for Agile Teams- Killing story points
Data skills for Agile Teams- Killing story pointsyasinnathani
 
Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsP&CO
 
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 Building Your Personal Brand on LinkedIn - Expert Planet-  2024 Building Your Personal Brand on LinkedIn - Expert Planet-  2024
Building Your Personal Brand on LinkedIn - Expert Planet- 2024Stephan Koning
 
Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access
 
Upgrade Your Banking Experience with Advanced Core Banking Applications
Upgrade Your Banking Experience with Advanced Core Banking ApplicationsUpgrade Your Banking Experience with Advanced Core Banking Applications
Upgrade Your Banking Experience with Advanced Core Banking ApplicationsIntellect Design Arena Ltd
 
AMAZON SELLER VIRTUAL ASSISTANT PRODUCT RESEARCH .pdf
AMAZON SELLER VIRTUAL ASSISTANT PRODUCT RESEARCH .pdfAMAZON SELLER VIRTUAL ASSISTANT PRODUCT RESEARCH .pdf
AMAZON SELLER VIRTUAL ASSISTANT PRODUCT RESEARCH .pdfJohnCarloValencia4
 
The End of Business as Usual: Rewire the Way You Work to Succeed in the Consu...
The End of Business as Usual: Rewire the Way You Work to Succeed in the Consu...The End of Business as Usual: Rewire the Way You Work to Succeed in the Consu...
The End of Business as Usual: Rewire the Way You Work to Succeed in the Consu...Brian Solis
 
Personal Brand Exploration Presentation Eric Bonilla
Personal Brand Exploration Presentation Eric BonillaPersonal Brand Exploration Presentation Eric Bonilla
Personal Brand Exploration Presentation Eric BonillaEricBonilla13
 
NASA CoCEI Scaling Strategy - November 2023
NASA CoCEI Scaling Strategy - November 2023NASA CoCEI Scaling Strategy - November 2023
NASA CoCEI Scaling Strategy - November 2023Steve Rader
 
Chapter_Five_The_Rural_Development_Policies_and_Strategy_of_Ethiopia.pptx
Chapter_Five_The_Rural_Development_Policies_and_Strategy_of_Ethiopia.pptxChapter_Five_The_Rural_Development_Policies_and_Strategy_of_Ethiopia.pptx
Chapter_Five_The_Rural_Development_Policies_and_Strategy_of_Ethiopia.pptxesiyasmengesha
 
7movierulz.uk
7movierulz.uk7movierulz.uk
7movierulz.ukaroemirsr
 

Kürzlich hochgeladen (20)

Live-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarLive-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry Webinar
 
Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..
 
Harvard Business Review.pptx | Navigating Labor Unrest (March-April 2024)
Harvard Business Review.pptx | Navigating Labor Unrest (March-April 2024)Harvard Business Review.pptx | Navigating Labor Unrest (March-April 2024)
Harvard Business Review.pptx | Navigating Labor Unrest (March-April 2024)
 
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
 
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfPDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
 
Trauma Training Service for First Responders
Trauma Training Service for First RespondersTrauma Training Service for First Responders
Trauma Training Service for First Responders
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
 
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfTalent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
 
Data skills for Agile Teams- Killing story points
Data skills for Agile Teams- Killing story pointsData skills for Agile Teams- Killing story points
Data skills for Agile Teams- Killing story points
 
Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizations
 
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 Building Your Personal Brand on LinkedIn - Expert Planet-  2024 Building Your Personal Brand on LinkedIn - Expert Planet-  2024
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 
Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024
 
Upgrade Your Banking Experience with Advanced Core Banking Applications
Upgrade Your Banking Experience with Advanced Core Banking ApplicationsUpgrade Your Banking Experience with Advanced Core Banking Applications
Upgrade Your Banking Experience with Advanced Core Banking Applications
 
AMAZON SELLER VIRTUAL ASSISTANT PRODUCT RESEARCH .pdf
AMAZON SELLER VIRTUAL ASSISTANT PRODUCT RESEARCH .pdfAMAZON SELLER VIRTUAL ASSISTANT PRODUCT RESEARCH .pdf
AMAZON SELLER VIRTUAL ASSISTANT PRODUCT RESEARCH .pdf
 
The End of Business as Usual: Rewire the Way You Work to Succeed in the Consu...
The End of Business as Usual: Rewire the Way You Work to Succeed in the Consu...The End of Business as Usual: Rewire the Way You Work to Succeed in the Consu...
The End of Business as Usual: Rewire the Way You Work to Succeed in the Consu...
 
Personal Brand Exploration Presentation Eric Bonilla
Personal Brand Exploration Presentation Eric BonillaPersonal Brand Exploration Presentation Eric Bonilla
Personal Brand Exploration Presentation Eric Bonilla
 
NASA CoCEI Scaling Strategy - November 2023
NASA CoCEI Scaling Strategy - November 2023NASA CoCEI Scaling Strategy - November 2023
NASA CoCEI Scaling Strategy - November 2023
 
Chapter_Five_The_Rural_Development_Policies_and_Strategy_of_Ethiopia.pptx
Chapter_Five_The_Rural_Development_Policies_and_Strategy_of_Ethiopia.pptxChapter_Five_The_Rural_Development_Policies_and_Strategy_of_Ethiopia.pptx
Chapter_Five_The_Rural_Development_Policies_and_Strategy_of_Ethiopia.pptx
 
7movierulz.uk
7movierulz.uk7movierulz.uk
7movierulz.uk
 
WAM Corporate Presentation Mar 25 2024.pdf
WAM Corporate Presentation Mar 25 2024.pdfWAM Corporate Presentation Mar 25 2024.pdf
WAM Corporate Presentation Mar 25 2024.pdf
 

A decade of CDO pricing

  • 1. A Decade of CDO Pricing World Congress on Computational Finance Jon Gregory [email_address] March 26 th 2007 trant: Cover Option 2
  • 2.
  • 4.
  • 5. Gaussian Copula Model in Action Many sudden credit events occurring early Several credit events Few credit events Hedging simulation of [3-6%] long protection position, delta hedged only
  • 6.
  • 7.
  • 9.
  • 10.
  • 12. Base Correlation – Interpolation and Extrapolation [16-17%] tranchelet Base Correlation Curve “ Tranchelet” Premiums
  • 13.
  • 14. Tranchelet Pricing – Some Extremes Maximum concavity, maximum dispersion, idiosyncratic risk 3 6 3 6 3 6 Tranche notional [0-3%] equity tranche  [0-1%], [1-2%] and [2-3%] tranchelets Minimum concavity, systemic risk effect 1,201 2-3% 1,201 1-2% 1,201 0-1% 61 2-3% 1,214 1-2% 3,090 0-1%
  • 15.
  • 17.
  • 18. Difficulty in fitting the market Implied Compound Correlation
  • 19. The Toothpaste Tube Analogy Super Senior 22-100% Equity 0-3% 3-6% 6-9% Index [0-100%] 12-22% 9-12% Index = Sum of tranches [22-100%] = [0-100%] – [0-3%] – [3-6%] – [6-9%] – [9-12%] – [12-22%]
  • 20.
  • 21.
  • 22. Bespoke Tranches – Normalisation Methods If the portfolio is more risky then an equivalent tranche is more risky How to we adjust the correlation curve we use to account for this? Index portfolio Bespoke portfolio Expected loss Tranche
  • 23. Bespoke Tranches – Normalisation Methods (II)
  • 24.
  • 26. Index Correlation – off the run tranches Index rolls give us more maturity information detach maturity correlation CDX.5 CDX.6 CDX.7 CDX.8 CDX.5 CDX.6 CDX.7 CDX.8 CDX.5 CDX.6 CDX.7 CDX.8 5Y 7Y 10Y “ Base Correlation” Surface CDX.4 CDX.4 CDX.4
  • 27. Index Correlation – HY/IG Different indices may provide complimentary information [15-30%] [25-35%] [10-15%] [15-25%] [7-10%] [10-15%] [3-7%] [0-10%] [0-3%] CDX HY CDX IG
  • 28. Index Correlation – HY/IG (II) Test out your pricing method 3% 7% 10% 15% 30% IG HY 3% 35% 25% 15% 10% IG HY
  • 29. Index Correlation – HY/IG (III) Obvious implications for Barbell portfolios [15-30%] [25-35%] [10-15%] [15-25%] [7-10%] [10-15%] [3-7%] [0-10%] [0-3%] CDX HY CDX IG
  • 30.
  • 31.
  • 32. The Challenges and Solutions Tranchelet pricing Bespoke Pricing Forward Starting Loss Surface Construction Tranche Options Enhanced Base Correlation Methods Implied Copula Approach Stochastic Intensity Models Dynamic Loss Models There is no one to one mapping in the above  Tranche options pricing may be very sensitive to tranchelet pricing “ Exotic” CDOs
  • 33.