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Weighted Monte Carlo Sensitivity The model is a non-parametric approach to value complex CDO structures that need to be priced using the market information on tranche losses at multiple points of time. Currently, the model is being used for the valuation of forward starting CDO trades (FSCDO) and loss-trigger leverage super senior tranches (LT-LSS). In the model, a more robust and efficient method is employed to compute the sensitivities of the risk factors that can be replicated by calibrating instruments. For FSCDO trades and LT-LSS trades it can be used to compute credit spread sensitivities and correlation sensitivities. The model is also improved to handle bucketed credit spread sensitivities and bucketed default sensitivities. The credit spread sensitivity, default sensitivity, correlation sensitivity, and interest rate sensitivity for FSCDO trades have been implemented in the model. The model serves the purpose of computing MTM and risk for the trades priced using weighted Monte Carlo simulation (WMC) model [3]. The WMC model is a non-parametric approach to value complex CDO structures that need to be priced using the market information of the tranche losses at multiple maturities. At the present time, the model is used for the valuation of forward starting CDO trades (FSCDO) and loss-trigger leverage super senior tranches (LT-LSS). Three components of the model are submitted. One is a new method of computing sensitivities of the risk factors that can be expressed as a function of the calibrating instruments. Specifically they are credit spread sensitivity and correlation sensitivity for FSCDO trades and LT-LSS trades. Compared with the old method, which is the shock-recalibration-revaluation of the risk factor, the new method is more efficient and more robust The second component is the computation of the bucketed credit spread sensitivity using the new method and the default sensitivity computation using the old method (“Method = DIRECT”). This improvement of the model enables us to define appropriate risk measures for FSCDO trades. A conservative approach is proposed for the default sensitivity, due to the fact the only spot default sensitivity is reported and managed in the current risk management framework which is not appropriate for forward starting trades. For a FSCDO trade with sold protection, the default sensitivity is defined as a MTM change if an obligor defaults at the forward starting date. For a FSCDO trade with bought protection, the default sensitivity is defined as a MTM change if we assume a spot default.
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