Forward-Start CDO's, Options on CDO's, and Calibration

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Forward-Start CDO's, Options on CDO's, and Calibration

by Michael Walker of the University of Toronto

March 27, 2007

Abstract: This article describes forward-start CDO's (FCDO's), options to start CDO's, and their risk-neutral valuation. The valuation method represents an extension of previous work (Walker, 2005, 2006) on a static model for the valuation of ordinary CDO's to a model containing the necessary dynamics. The focus of the work will be to develop a model with sufficient flexibility that it can be used to calibrate simultaneously to a reasonably wide range of prices for ordinary CDO's, FCDO's and options on CDO's in terms of a single risk neutral measure.

JEL Classification: G13.

Keywords: forward-start CDO's, options on CDO's, calibration, CDO's.

Download paper (162K PDF) 17 pages