Credit risk tools, (numerical methods for finance, university of Limerick 2011)

Francesco Paolo Esposito

MPRA Paper from University Library of Munich, Germany

Abstract: In this work, we solve a risk measurement problem, which involves both credit and market risk. Specifically, We deal with the problem of pricing a synthetic CDO tranche and with the assessment of the evolution behavior of value of the net income resulting from the exposure to a single credit derivative of this sort. We cope with the pricing problem by constructing algorithms capable of computing the key variables. The second problem is solved via Monte Carlo simulation. The calculations, which constitute the main input of the simulation engine, can be easily implemented since they only result in the operations of matrix inversion and numerical integration. The flexibility of the risk evaluation method, which has been achieved through stochastic simulation, allows the system to be easily escalated and extended to a collection of basket credit derivatives.

Keywords: CDS; CDO; default correlation; hazard rates; PD; LGD; Exposure at Default; Potential Future Exosure (search for similar items in EconPapers)
JEL-codes: C02 C15 (search for similar items in EconPapers)
Date: 2011-10
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:40081

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