Cash-Flow CDO Pricing with Amortization

Abstract

In this paper we propose a simple general setting for pri ing CDOs with amortization. The model is not intended to pri e market CDO produ ts but rather to study the joint impa t of amortization and default risk on a hypotheti al tran he spread. In our pri ing model the mortgage loans are allowed to amortize but not prepay and the amortization is allo ated "pro- rate" to the tran hes. Due to the omplexity of finding a losed form solution for su h a CDO stru ture we are using Monte Carlo simulations. Sin e default dependen y highly affe ts the loss distribution and therefore also the CDO spreads, the default times of the mortgage loans are al ulated using three different redit risk models, ea h imposing a different dependen y stru ture. Finally, the tran he spread sensitivity is analyzed with respe t to the input param- eters.