Synthetic CDOs : modelling, valuation and risk management

Cover -- Half-title -- Title -- Copyright -- Dedication -- Contents -- Preface -- Acknowledgements -- 1 A primer on collateralised debt obligations -- 1.1 Introduction -- 1.2 Securitisation and tranching -- 1.3 Credit derivative products -- 1.3.1 Credit default swaps (CDSs) -- 1.3.1.1 Forward starting CDSs -- 1.3.1.2 Credit default swaptions -- 1.3.1.3 Recovery rate plays -- 1.3.1.4 Constant maturity CDS (CMCDS) -- 1.3.2 Default baskets -- 1.3.3 Credit indices -- 1.3.4 Collateralised debt obligations (CDOs) -- 1.3.4.1 Cashflow CDOs -- 1.3.4.2 Synthetic CDOs -- 1.3.4.3 Single-tranche CDOs (STCDOs) -- 1.3.4.4 Options on index tranches -- 1.3.4.5 Tranchelets -- 1.3.4.6 Zero-coupon equity tranches -- 1.3.4.7 Structured investment vehicles (SIVs) -- 1.4 Chapter review -- 2 Modelling of obligor default -- 2.1 Introduction -- 2.2 Modelling single-name default as a Poisson process -- 2.2.1 The hazard rate model -- 2.2.2 Valuation of risky cashflows -- 2.3 Modelling default correlation-fundamental concepts -- 2.4 Introducing default dependence via copulas -- 2.4.1 Basic concepts -- 2.4.2 The Gaussian copula -- 2.4.3 The t copula -- 2.5 Rating transition methods for modelling obligor default -- 2.5.1 Formulation of the problem -- 2.5.2 Modelling rating transition dynamics -- 2.5.3 Determining risk-neutral transition probabilities -- 2.6 Chapter review -- 3 Valuation of credit default swaps -- 3.1 Introduction -- 3.2 Overview of vanilla credit default swaps -- 3.2.1 Description of the product -- 3.2.2 Cashflow mechanics -- 3.3 Valuation of vanilla CDSs -- 3.3.1 Valuing the fee leg -- 3.3.2 Valuing the contingent leg -- 3.3.3 Calculating the CDS PV -- 3.3.4 Calculating the CDS par spread -- 3.3.5 Calculating the CDS mark-to-market value -- 3.3.6 The credit triangle -- 3.3.7 Valuation via Monte Carlo simulation of obligor default times.