Finance Project

In recent years, the market for collateral debt obligations (CDOs) and, in particular, the development of the synthetic CDO market and correlation trading has resulted in significant developments in valuation and risk management for such products. The market has been dominated by developments around the static Gaussian copula model, the introduction of base correlation as an alternative to the compound correlation, and extensions to better capture the observed correlation smile/skew, only recently more dynamic models that incorporate credit spreads or other major modeling parameters have been introduced by practitioners and academics.

All valuation approaches are based on risk-neutral pricing principles and little focus has been given to replication-based arguments that would also lead to developments for practical hedging and risk management. Currently, risk management often focuses on static risk measures that address the likelihood of a CDO investor receiving full notional and actual interest in a timely manner (ratings perspective), or on mark-to-market (MtM) sensitivities and “the greeks” frequently employed by correlation investors and traders.
Continue Reading »

Although the market size of SF products such as asset-backed securities (ABS), collateralized debt obligations (CDO), residential-mortgage backed securities (RMBS), etc. has grown enormously over the past decade, only little is known about their behavior in terms of rating migration, especially default, compared to corporates.

Credit risk portfolio models generally rely on the estimation of rating migration and/or default probabilities and asset correlation between exposures.† The latter significantly affects the portfolio loss distribution and in particular the tails of the distribution. Therefore, the accuracy of these parameter estimates is of vital importance. Another way to secure your assets is by buying insurance, some insurance giving full warranty and ease of access in document and filling.
Continue Reading »