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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Mappings<br />
<br />
Method 2: ATM mapping<br />
Adjusts for recovery rates<br />
Two tranches are equivalent if their strikes lie in the same region of the capital structure with respect to E[PL]<br />
But dispersion is not captured<br />
<br />
Method 3: Probability Matching<br />
Two tranches are priced with the same correlation if they have the same probability of being wiped out<br />
Problem: Discrete losses need to be smooth cumulative loss distribution<br />
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