Pricing Baskets using Gaussian Copula and BET Methodology: a Market Test

by João Garcia of Dexia Group,
Geert Gielens of Dexia Bank,
Luc Leonard of Dexia Group, and
Tony Van Gestel of Dexia Group

June 23, 2003

Abstract: In this article we show how the copula and the BET methodology can be used to price baskets of credit derivatives. After brief descriptions of both algorithms we use market data to price first to default and first loss contracts on baskets of credit derivatives. Additionally the copula approach is used with Moody and Standard and Poors correlation functions (this makes things simpler to back office to have a quick present value of baskets) and different recovery assumptions. All the tests are made using market data and the results are then compared with prices given by market makers.

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