Pricing Bespoke Tranche using Base Expected Loss

• Main Authors: Chung-Yao Lin, 林崇曜
• Other Authors: 李賢源
• Format: Others
• Language: zh-TW
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/59580361903044476786

碩士 === 國立臺灣大學 === 財務金融學研究所 === 97 === The compound correlations can be inferred from markets quotes with a standard model; however, there exists the behavior of compound correlation smile. The concept of base correlation which makes evaluation of bespoke tranche possible was introduced by the market, but interpolating base correlation for standard tranches directly will generate unreasonable fair spread for bespoke tranches. This paper discusses the reasons generating unreasonable fair spread for bespoke tranches when performing different interpolations, introduces the idea of base expected loss, and constructs the upper and lower bounds using the properties that the base expected loss must obey; the base correlation implied from base expected loss curve with different interpolation exists the behavior of base correlation smile. Then constructing the base expected loss curve that is monotonic increase and concave down proposed by Parcell & Wood can used to price any bespoke tranches in the absence of arbitrage.