Learning Curve

The second part of this Learning Curve describes results from a model recently published by Claudio Albanese and Alicia Vidler from the department of mathematics at Imperial College, London.

This Learning Curve describes a model recently published by Claudio Albanese and Alicia Vidler from the department of mathematics at Imperial College, London.

Many investors are already familiar with tranched investments in home equity loan backed-securities portfolios via asset-backed securities collateralized debt obligations CDOs (ABS CDOs), or other corporate tranched markets such as iTraxx and CDX.

The first wave of constant proportion debt obligations takes exposure to only the on-the-run iTraxx and CDX indices.

Last year proved to be another break-through year for structuring fund-linked investment products in the U.S. Guidance from the Securities Exchange Commission, along with historic U.S. pension fund reforms, allowed dealers to structure closed-end fund-of-funds platforms that offer both institutional and retail investors leveraged access to single-manager hedge funds.

A collateralized commodity obligation consists of commodity risk repackaged into a synthetic CDO structure.

The over-the-counter interest-rate and currency derivatives market has continued to experience spectacular growth.

Common market best practice for pricing off-the-run or bespoke collateralized debt obligation tranches involves mapping implied base correlation surfaces calibrated from actively traded tranches such as those on the CDX or iTraxx.

Benign monetary policy in mature market countries and high liquidity-induced demand have put a premium on the risk diversification of alternative asset classes outside of conventional investment, such as emerging market equity.

Last week's Learning Curve introduced the gamma model as a replacement to the base correlation approach.

The standard market model for pricing collateralized debt obligations is base correlation, but it suffers from known problems.

Leveraged certificates or knock-out products were introduced in Europe about four years ago and contribute to a substantial part of the total daily volume of structured product trading.