Managing Synthetic CDO Tranches using Base Correlations
Managing Synthetic CDO Tranches using Base Correlations
Managing Synthetic CDO Tranches using Base Correlations
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Apply stress test<br />
Assume stress applies to a “calm” market environment<br />
Explicit base correlation shift<br />
<strong>Base</strong> correlation<br />
stress increases price<br />
Positions<br />
Tranche<br />
notional ($M)<br />
Upfront<br />
price ($M)<br />
DV01<br />
($000)<br />
Index<br />
($000)<br />
<strong>Base</strong> correl<br />
($000)<br />
Market<br />
spreads ($000)<br />
Sell 0-3% 3 0.73 -29 -217 64 -141<br />
Sell 3-7% 4 0.00 -10 -82 -2 -78<br />
Index 50 0.00 -22 -183 0 -183<br />
Implicit base correlation shift<br />
Positions<br />
Tranche<br />
notional ($M)<br />
Upfront<br />
price ($M)<br />
DV01<br />
($000)<br />
Index<br />
($000)<br />
<strong>Base</strong> correl<br />
$000)<br />
Market<br />
spreads ($000)<br />
Sell 0-3% 3 0.73 -29 -217 -108 -349<br />
Sell 3-7% 4 0.00 -10 -82 -63 -188<br />
Index 50 0.00 -22 -183 0 -183<br />
19
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