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Applied
Math Seminar
Winter Quarter 2002
3:15 - 4:15 p.m.
Sloan Mathematics Corner
Building 380, Room 380-C
Friday, March 8, 2002
Zhifeng (Frank) Zhang
Morgan Stanley
An Efficient Model for Pricing Basket Default Swaps
Abstract:
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As the credit derivative market continues to grow, there
are increasing demands for pricing and risk management of credit derivative
portfolio. Among the most important instruments are the basket default
swap and CDO (Collateralized Debt Obligation). It is fundamentally important
to develop default models that are capable of capturing the default correlation
and providing for robust algorithms to generate loss distribution.
In this talk, we present in detail a model for pricing both single name
and basket default swaps. We also present a robust Monte Carlo method
to generate correlated default arrival times. The core of the algorithm
relies on two ingredients: Copula function and compensator algorithm.
The robustness is obtained by making use of the analytic al tractability
of exponential affine models.
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