<t>Pedersen's Lehman paper is on this forum on the thread "Index CDS Option / CDX (TRACX) Option".Although simplistic, it is the model most used in the market.To explain further:Index options are now available out to 1-year with several strikes. As the payoff contains both the forward CDS and paymen...

<t>Has anyone tried calibrating a reduced form loss model (such as the SPA model or the Schonbucher version) to both the tranche spreads and the index option premiums? The index option premiums are usually consistent with a lognormal distribution of the option payoff (which includes defaults prior t...

<r>If you come across it, let me know... <EMAIL email="s.ibbotson@gmail.comThe">s.ibbotson@gmail.comThe</EMAIL> market "seems" to value the underlying loans in two different regions:Below par, the loan is largely priced w.r.t the default risk. Above par, the loan is largely concerned with the callab...

<t>Erstwhile, that's not correct. The payout for a CDS index option includes default payout prior to exercise date... and the deliverable (the CDS) has default risk on the notional. The range accrual does not include default prior to exercise and often has a non-risky notional. Therefore, European o...

<t>EOM rule... it's been a while since I did this but I believe that the EOM rule is not compounded. So, if we are on the 31st August 6M takes us to 28th Feb, 12M then takes us to 31st August. In other words, it is the first reference day of the month that counts - not the subsequent period end days...

<t>Hi ljcao, I'm trying to do this aswell.The main problem is "What happens to the spread when a default occurs?". We otherwise could fit some arbitrary dynamics to the credit index spread and option prices. Unfortunately, if the spread were not expected to change when default happens, then the skew...

Try the paper"Mathematical foundation of Convexity Correction" by Pelsser. It expresses the required measure transform for quanto-CMS.

<t>gc,If you're still looking for a simple way to replace your log-linear interpolation method... try the following.Interpolate the par-rates (i.e. the swap rates) to the required cashflow dates. Then bootstrap the zero-rates from these synthetic rates.Linear interpolation gives a "sawtooth" forward...