Download manual (631K PDF) - DefaultRisk.com
Download manual (631K PDF) - DefaultRisk.com
Download manual (631K PDF) - DefaultRisk.com
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
CDO models: Opening the black box – Part four<br />
Monte Carlo cookbook recipe..<br />
..a very simple algorithm<br />
►<br />
For pricing purposes, the above described approach is applied on portfolio level<br />
►<br />
For each Monte-Carlo run<br />
‣ Draw a random number for each credit<br />
‣ Generate dependent default times using the copula of choice<br />
‣ A given tranche experiences a default event, resulting in a principal loss, if the total loss corresponding to the number of defaults<br />
occurring before the tranche’s maturity is higher than the attachment point<br />
‣ For each tranche, store the PV of losses<br />
►<br />
Repeat n times, where n is the number of simulations<br />
►<br />
Once finished:<br />
‣ Calculate the expected loss for each tranche, by summing all discounted losses and dividing this by the number of simulations<br />
‣ Calculate the DV01<br />
‣ Divide the tranche EL by the DV01 to arrive at the fair spread<br />
10
Change language