Dynamic Hedging of Synthetic CDO Tranches: Bridging the Gap between Theory and Practice

Cousin, Areski; Laurent, Jean‐Paul

doi:10.1002/9781118531839.ch6

Cited by 2 publications

(2 citation statements)

References 51 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…This is an easy way to obtain the drift term in Equation (6). It turns out that the cum-dividend CDS price process has the following dynamics…”

mentioning

confidence: 99%

See 1 more Smart Citation

Hedging portfolio loss derivatives with CDS's

Cousin¹,

Jeanblanc²

2012

Advances in Statistics, Probability and Actuarial Science

Self Cite

View full text Add to dashboard Cite

In this paper, we consider the hedging of portfolio loss derivatives using single-name credit default swaps as hedging instruments. The hedging issue is investigated in a general pure jump dynamic setting where default times are assumed to admit a joint density. In a first step, we compute default intensities adapted to the global filtration of defaults. In particular, we stress the impact of a default event on the price dynamics of non-defaulted names. In a two defaults setting, we also fully describe the hedging of a loss derivative with single name instruments. The methodology can be applied recursively to the case of a multidefault setting. We completely characterize the hedging strategies for general n-dimensional credit portfolios when default times are assumed to be ordered. The computation of the hedging strategies does not require any Markovian assumption.

show abstract

“…This is an easy way to obtain the drift term in Equation (6). It turns out that the cum-dividend CDS price process has the following dynamics…”

mentioning

confidence: 99%

“…As a result, the performance and efficiency of underlying hedging methods is going to have a direct impact on the amount of capital required for loss derivatives. Cousin and Laurent (2010) discuss various issues related to the use of models in designing hedging strategies for CDO tranches and back-testing or assessing hedging performance.…”

Section: Introductionmentioning

confidence: 99%