Managing Synthetic CDO Tranches using Base Correlations

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Synthetic CDO mechanics losses Protection buyer pays spread for protection against a portion of portfolio Typically, premium is paid as a spread on remaining notional over deal’s life Underlying portfolio is a portfolio of single-name CDSs Correlation is a key factor for pricing CDOs Correlation does not affect the portfolio expected loss, But redistributes losses around the capital structure 4
Synthetic CDO Mechanics Protection buyer Protection Seller Dealer Tranche spread Loss payments CDO Tranche 5
Page 2 and 3: Managing synthetic CDO tranches usi
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 22 and 23: Agenda Synthetic CDO mechanics Ba
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

Managing Synthetic CDO Tranches using Base Correlations

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