This paper provides a Market Model which implies a dynamics for standardized CDS index tranche spreads, i.e. tranches which securitise CDS index series and dispose of predefined subordination. This model is useful for pricing options on tranches with future Issue Dates as well as for modeling options on structured credit derivatives. With the upcoming regulation of the CDS market in perspective, the model presented here is also an attempt to face the effects on pricing approaches provoked by an eventual Clearing Chamber . It becomes also possible to calibrate Index Tranche Options with bespoke tenors/tranche subordination to market data obtained by more liquid Index Tranche Options with standard characteristics.
CDO; CDS; Index tranche; Market model; tranche spread; forward
Main Research Area:
Quantitative Methods in Finance Conference (QMF), 2009