Converting upfront into running spreads

wahoo2000 · August 18th, 2005, 4:41 pm

Correct... and your present CDO model is apparently telling you PV (Default Payments) = 1500bps*RiskyPV01

CDO2 · August 18th, 2005, 4:56 pm

yes, thanks.

CDO2 · August 19th, 2005, 2:56 pm

Thanks for your email.Do you know a sensible method for converting the 0-3% standard tranche upfront to running spreads.I can no longer use the pricing eqution sense i have many unknowns and only one equation. e.g. RunningSpread*RiskyPV01 + Upfront = PV(Default Payments)Now the only known parameters I have is RunningSpread=500bps and upfront 25%. But I dont know PV(Default Payments) and RiskyPV01 to convert the upfront (25%) to runningspreads.Regards

wahoo2000 · August 19th, 2005, 3:19 pm

Your CDO model should allow you to calculate Risky PV01 and PV(Default Payments). If it doesn't focus your time and energy on uderstanding how to calculate them and build a model that does. Through this process the rest should become more clear.

CDO2 · August 19th, 2005, 4:11 pm

I am not sure if you followed me.I m fine with my model it calculates all that and I can convert the spreads into upfront etc. But i want to change the upfront quoted on bloomberg for equity tranche to running spreads - we dont know what Risky PV01 and PV(Default Payments) were used to get 500bps +25% upfront?How could you convert the quoted upfront to spreads not knowing the PV01 and PV(def payment)Regards

wahoo2000 · August 19th, 2005, 4:38 pm

You can't. That is why you have to use your model (or CDSM).

CDO2 · August 24th, 2005, 3:05 pm

Thanks for your emails.A quick check - suppose we have:RunningSpread = 1221bpsRiskyPV01 = 13490 (PV of 1 bps)PV(Default Payments) = 16467472And want to work out and Upfront + 500bpsWhat upfront do you get?Many thanks

CDO2 · August 24th, 2005, 3:05 pm

Thanks for your emails.A quick check - suppose we have:RunningSpread = 1221bpsRiskyPV01 = 13490 (PV of 1 bps)PV(Default Payments) = 16467472And want to work out and Upfront + 500bpsWhat upfront do you get?Many thanks

johnself11 · September 1st, 2005, 5:31 pm

btw if your pricing model doen't explicity show you the PV01 all you have to do is perturb the underlying yield curve by 1 basis point and observe how the price of the bond changes....

CDO2 · September 5th, 2005, 9:49 am

thanks for your email. say we calculated the upfront for the below data, using Upfront = PV (Default Payments) - 500bps*RiskyPV01: we get 721bps for upfront. How do we change this to %?Reg,RunningSpread = 1221bpsRiskyPV01 = 13490 (PV of 1 bps)PV(Default Payments) = 16467472