Hong Kong Rachel Hardee +852 2263 9918 rachel.hardee @derivativefitch.com Introduction Constant proportion debt obligations (CPDOs) are one of the latest product innovations seen in the structured credit markets. Like other more recent structured credit products, the performance of the issued debt obligations is highly dependent on the mark-to-market (MtM) impact of changes in credit spreads. C...

We propose algorithms of adaptive integration for calculation of the tail probability in multi-factor credit portfolio loss models. We first devise the classical Genz-Malik rule, a deterministic multiple integration rule suitable for portfolio credit models with number of factors less than 8. Later on we arrive at the adaptive Monte Carlo integration, which simply replaces the deterministic int...

The amount of capital necessary to support a portfolio of debt securities depends on the probability distribution of the portfolio loss. Consider a portfolio of loans, each of which is subject to default resulting in a loss to the lender. Suppose the portfolio is financed partly by equity capital and partly by borrowed funds. The credit quality of the lender's notes will depend on the probabili...

Article history: Received 12 July 2010 Received in revised form 5 May 2011 Accepted 12 May 2011 Available online 18 May 2011 Traditional credit risk models adopt the linear correlation as a measure of dependence and assume that credit losses are normally-distributed. However some studies have shown that credit losses are seldom normal and the linear correlation does not give accurate assessment...

The amount of capital necessary to support a portfolio of debt securities depends on the probability distribution of the portfolio loss. Consider a portfolio of loans, each of which is subject to default resulting in a loss to the lender. Suppose the portfolio is financed partly by equity capital and partly by borrowed funds. The credit quality of the lender's notes will depend on the probabili...

The estimation of the profit and loss distribution of a loan portfolio requires the modelling of the portfolio’s multivariate distribution. This describes the joint likelihood of changes in the credit-risk quality of the loans that make up the portfolio. A significant problem for portfolio credit risk measurement is the greatly restricted data that are available for its modelling. Under these c...

Merrill Lynch Bank USA has a multibillion dollar portfolio of revolving credit-line commitments with over 100 institutions. These credit lines give corporations access to a specified amount of cash for short-term funding needs. A key risk associated with credit lines is liquidity risk, or the risk that the bank will need to provide significant assets to the borrowers on short notice. We develop...