This article describes a new approach to compute values and sensitivities of synthetic collateralized debt obligation (CDO) tranches in the market-standard, single-factor, Gaussian copula model with base correlation. We introduce a novel decomposition of the conditional expected capped portfolio loss process into “intrinsic value” and “time value” components, derive a closed form solution for the intrinsic value, and describe a very efficient computational scheme for the time value, taking advantage of a curious time stability of this quantity.
Flesaker, B. (2008), "Fast solution of the Gaussian copula model", Fouque, J., Fomby, T. and Solna, K. (Ed.) Econometrics and Risk Management (Advances in Econometrics, Vol. 22), Emerald Group Publishing Limited, Bingley, pp. 1-13. https://doi.org/10.1016/S0731-9053(08)22001-3Download as .RIS
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