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Structured Credit Products: Credit Derivatives and Synthetic Securitisation, 2nd Edition by Moorad Choudhry

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CHAPTER 16

Files on the Accompanying CD-R

The CD-R at the back of this book holds a number of files that can be used by practitioners and lecturers in credit derivatives. These are detailed here.

CDO-NOTE: SYNTHETIC CDO NOTE PRICING MODEL1

Software Description

CDO-NOTE uses a one-factor Gaussian mathematical framework to price synthetic CDO note tranches. The software is extremely easy to use and comes with a full description of the model and its parameters. In addition, there is a step-by-step description on how to use the model and view and interpret the results. The software is meant to provide users with an affordable means to understand the dynamics of CDO pricing and default distributions. The software offers two representations:

1. A Monte Carlo approach to simulate correlated default times of portfolio credits and generate portfolio expected losses;

2. A recursive approach based on conditional default independence to produce the portfolio expected losses.

The two representations of the default process are equivalent under the Gaussian assumption and thus ought to produce the same results.

Each method has its pros and cons. The recursive approach, on the one hand, is extremely efficient and fast. On the other hand, the Monte Carlo approach is more flexible but slower. For example, the recursive approach is ill-suited for high levels of spreads and correlations above 70%. High levels of spreads and correlations are more appropriately handled by the Monte Carlo approach. ...

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