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Efficient hybrid methods for portfolio credit derivatives
Authors:H. Zheng
Affiliation:1. Department of Mathematics , Imperial College , London, SW7 2BZ, UK h.zheng@imperial.ac.uk
Abstract:In this paper we discuss the computation of basket credit default swaps and collateralized debt obligation squared transactions. We suggest two hybrid algorithms for these two portfolio credit derivatives. The method combines the analytic approximation to the loss distribution of conditionally independent heterogeneous portfolios with the Monte Carlo simulation. The efficiency and accuracy of the algorithms are illustrated with examples.
Keywords:Heterogeneous portfolios  Normal approximations  Hybrid algorithms  Basket credit default swaps  CDO squared distributions
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