Pricing and Hedging of CDOs: A Top Down Approach

Damir Filipović () and Thorsten Schmidt ()
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Damir Filipović: Swiss Finance Institute, Ecole Polytechnique Fédérale de Lausanne (EPFL) and Swiss Finance Institute
Thorsten Schmidt: Chemnitz University of Technology, Department of Mathematics

A chapter in Contemporary Quantitative Finance, 2010, pp 231-253 from Springer

Abstract: Abstract This paper considers the pricing and hedging of collateralized debt obligations (CDOs). CDOs are complex derivatives on a pool of credits which we choose to analyse in the top down model proposed in Filipović et al. (Math. Finance, forthcoming, 2009). We reflect on the implied forward rates and bring them in connection with the top-down framework in Lipton and Shelton (Working paper, 2009) and Schönbucher (Working paper, ETH Zurich, 2005). Moreover, we derive variance-minimizing hedging strategies for hedging single tranches with the full index. The hedging strategies are given for the general case. We compute them also explicitly for a parsimonious one-factor affine model.

Keywords: Term Structure; Credit Default Swap; Forward Rate; Hedging Strategy; Gain Process (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-642-03479-4_13

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DOI: 10.1007/978-3-642-03479-4_13

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