PRICING AND HEDGING OF CDO-SQUARED TRANCHES BY USING A ONE FACTOR LEVY MODEL

摘要

This paper provides a comparison of the exponential copula Levy model with the classicalGaussian copula model for the pricing of CDO-squared tranches. Several approximationsof the recursive approach are considered: a full Monte Carlo approximation, a multivari-ate Normal approximation of the joint inner CDO loss distribution and a multivariatePoisson approximation of the joint number of defaults affecting the inner CDOs. Moreparticularly, a sensitivity analysis is carried out for three particular days characterized bya low, medium and high value of the quoted iTraxx and CDX index spreads. Moreover,this paper features a comparison of the exponential Levy and Gaussian Deltas under themultivariate Normal approximation for a period extended from 20 September 2007 until13 February 2008. The Deltas are computed with respect to a weighted and unweightedversion of the CDS pool as well as with respect to another CDO-squared tranche.