Pricing of Forward Starting Collateralized Debt Obligation

Abstract

During the last years, credit derivatives have developed at a very fast pace, and a market for CDOs has emerged. Although the financial crisis has seriously hit this expansion, valuation of both spot and forward starting instruments is more than ever under scrutiny from banks and regulators. This thesis introduces the fundamental concepts of the credit derivatives world, and implements the algorithm introduced by Schonbucher in order to price forward starting CDOs. To do so, we are here introducing a new way of implying loss distribution from market-quoted CDOs tranches, and checking the sensitivity of the most common valuation model, JP Morgan's Large Pool Model. The results thus obtained are first checked for consistency and second compared to forward starting CDOs prices derived by Hull & White.