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Credit Risk Analysis of Cashflow CDO Structures

by Philippos Papadopoulos of ABN AMRO, and
Caroline I.M.L. Tan of ABN AMRO

November 30, 2007

Abstract: Rating cash flow CDO structures is a challenge. We develop a method that offers consistent and computationally efficient credit risk analysis of cash flow CDO structures. The proposal makes use of simple portfolio models that admit semi-analytic representations of the loss distribution, combined with detailed and fast calculations of realistic interest and principal cash flow waterfalls. We define in this context and study credit tranche risk measures such as the probability of loss and expected loss-given-default and the variance of the latter. We benchmark our approach against the stress-scenario based analysis favored by cash flow CDO market practitioners.

Keywords: cashflow, cdo, clo, waterfall, credit risk, credit rating, risk measures, single factor, triggers, debt covenants, Vasicek, overcollateralization.

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