Hedging and Asset Allocation for Structured Products

by Robert Lamb of Imperial College,
Vladislav Peretyatkin of Imperial College, and
William Perraudin of Imperial College

December 2005

Abstract: This paper presents techniques for hedging structured products in incomplete markets. Under actual distributions, we simulate correlated ratings histories for pool exposures up to the hedging horizon and then employ conditional pricing functions estimated from a preliminary Monte Carlo based on risk adjusted distributions. The approach is very flexible. We apply it to a realistic multi-period CDO transaction.

JEL Classification: D82, G13, C73.

Keywords: Structured Products, Hedging, Pricing, Regression, Conditional Pricing Functions.

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