Mark-to-model for cash CDOs through indifference pricing

Guillaume Bernis

Quantitative Finance, 2012, vol. 12, issue 1, 39-48

Abstract: We define a mark-to-model for cash collateralized debt obligations based on an indifference price with an exponential utility function. The risk model is driven by a one-factor Gamma process representing the cumulated default intensity of the collateral, calibrated using historical data. The risk aversion can be calibrated using liquid instruments (bonds). Using a Monte-Carlo method, we can produce cash flow distributions in accordance with the specific waterfall of the product. We then compute the indifference price using these distributions. We provide examples with comparisons with market prices.

Date: 2012
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DOI: 10.1080/14697688.2011.620977

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