Economy – Quantitative Finance – Pricing of Securities
Scientific paper
2010-04-11
Economy
Quantitative Finance
Pricing of Securities
19 pages, 9 tables
Scientific paper
We performed a comprehensive analysis on the price bounds of CDO tranche options, and illustrated that the CDO tranche option prices can be effectively bounded by the joint distribution of default time (JDDT) from a default time copula. Systemic and idiosyncratic factors beyond the JDDT only contribute a limited amount of pricing uncertainty. The price bounds of tranche option derived from a default time copula are often very narrow, especially for the senior part of the capital structure where there is the most market interests for tranche options. The tranche option bounds from a default time copula can often be computed semi-analytically without Monte Carlo simulation, therefore it is feasible and practical to price and risk manage senior CDO tranche options using the price bounds from a default time copula only. CDO tranche option pricing is important in a number of practical situations such as counterparty, gap or liquidation risk; the methodology described in this paper can be very useful in the above described situations.
Li Yadong
Shater Ariye
No associations
LandOfFree
Valuation Bound of Tranche Options does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Valuation Bound of Tranche Options, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Valuation Bound of Tranche Options will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-186408