Hi,I have implemented Hull and Whites Probability bucketing approach for pricing the tranches (in Appendix B of their paper: Valuation of a CDO and nth to default CDS without Monte-Carlo Simulation)I however used the same Same notional size for all the 125 assets in the basket (I implemented it for - Dow Jones CDX NA IG 5yr index, but want to make it generic and work for non-homogeneous baskets.)I want to extend this implementation to take care of different notional size. Is it possible to do that given that the order in which the assets default would now be important.Any ideas/hints would be appreciated.Thanks,Tarun

Yes it is possible and easy to take into account.The way to do it is to build a distribution of Notional in your portfolio. Then in order to find the loss distribution you condition on the number of default:The Loss distribution is easely found given that only one default (d=1) happen (it is the same as the Notional distribution)When (d>1), you need to convolve d times the Notional distribution with itself in order to find the loss distribution.

Hi Meteor, Is this documented somewhere? Please let me know.Thanks,Tarun

This is where I found it (on pg 26):http://fisher.utstat.toronto.edu/benjam ... la.pdfFrom that paper it seems there is another article using this method (the convolution) but I don't have it:De Prisco, B., Iscoe I., Kreinin. A, (2005), "Loss in Translation: New approach for valuing synthetic collateralized debt obligations", RISK, June 2005.

Thanks meteor!!