Posted by
japari on
URL: http://quantlib.414.s1.nabble.com/Questions-Re-The-CDO-Class-tp840p842.html
Hi again,
> But I just made the attachment
> and detachment correlations the same. Guess that would be pretty much
> the same with compound correlation.
True, that should work.
>
> I was not using 0 RR. But IMHO, 0-100% spread should be the same with
> index spread. Could you please say more about LHP and why there could
> be difference between 0-100% spread and index spread?
>
The difference is that under a name's default the notional in a CDS is zero, the
instrument knocks out independently of the realized recovery rate; in a credit
index swap the contract goes on after a default with a notional reduced by the
weight of the name in the basket independently of the realized recovery. In
a (QL) tranche the notional is reduced by the amount actually lost (recovery
dependent then) falling within tranche limits. So in a [0-100] tranche, under
a model with a fixed deterministic RR, you can not lose all the notional and
even in the case of all your names defaulting you still have some notional left
and will be receiving coupon till maturity. The equivalent contract would be a
CDS which doesnt knock out after default but pays a coupon on a notional
reduced by a LGD factor.
The default legs NPVs should match though. Is that the case?
For LHP see the class GaussianLHPCDOEngine in:
ql/experimental/credit/syntheticcdoengines.Xpp
But to compare to BBG use an heterogeneous algorithm, InhomogeneousPoolCDOEngine
would be my pick. Also notice you have lots of nuts and bolts to play around with;
to name a few, the copula integration limits and points, the number of buckets or
quadrature points in other engines, the period in the integration algorithms...some
of these get critical for high correlation values.
> One reason for my results to be different with BBG is the discount
> curve. I am using some dummy flat curve set at 5 YR USD Swap. But I
> don't know if that's enough to justify the difference. Let me double
> check my codes again and put my results here.
>
See what happens and if it does not match, can you report the differences and the
input data pls? And maybe the code too.
Best regards
Pepe
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