Managing Synthetic CDO Tranches using Base Correlations
Managing Synthetic CDO Tranches using Base Correlations Managing Synthetic CDO Tranches using Base Correlations
Agenda Synthetic CDO mechanics Base correlations under Gaussian copula model Stress tests Mapping bespoke tranches to standard index tranches Interpolation / extrapolation of base correlations 22
Pricing bespoke tranches under the base correlation framework What’s a bespoke tranche Non-standard custom CDO tranche The investor chooses: Reference portfolio Attachment/detachment points Maturity Other details Term used to distinguish SCDO tranches from (liquid) index tranches Typically, refers to a different reference portfolio It’s illiquid Can we use standard tranche indices to price and capture risk for bespokes Standard index tranches: CDX 0-3%, 3-7%, 7-10%, 10-15%, 15-30% iTraxx 0-3%, 3-6%, 6-9%, 9-12%, 12-22% 23
- Page 2 and 3: Managing synthetic CDO tranches usi
- Page 4 and 5: Synthetic CDO mechanics losses Pro
- Page 6 and 7: Protection buyer can hedge by selli
- Page 8 and 9: Agenda Synthetic CDO mechanics Ba
- Page 10 and 11: Gaussian Copula Model (con’t) S
- Page 12 and 13: Base correlation framework Each tr
- Page 14 and 15: Stress tests Base correlations c
- Page 16 and 17: Subprime crisis has spread to … L
- Page 18 and 19: Stress Test Example for CDX.NA.IG S
- Page 20 and 21: So which stress test makes sense I
- Page 24 and 25: Mapping base correlations between b
- Page 26 and 27: Base correlation mapping methods Fi
- Page 28 and 29: Method 4: Expected Tranche Loss Pro
- Page 30 and 31: Comparison of mappings for iTraxx S
- Page 32 and 33: Heterogeneous portfolios Can we fin
- Page 34 and 35: Consider linear interpolation iTrax
- Page 36: Summary Base correlation are usef
Agenda<br />
<br />
<strong>Synthetic</strong> <strong>CDO</strong> mechanics<br />
<br />
<strong>Base</strong> correlations under Gaussian copula model<br />
<br />
Stress tests<br />
<br />
Mapping bespoke tranches to standard index tranches<br />
<br />
Interpolation / extrapolation of base correlations<br />
22
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