Serving the Quantitative Finance Community
Taking into account index basis for base correl calibration
Hi,Considering the base correlation calibration we need mainly the following inputs:- CDS spreads of the underlying names- market spread of the underlying standard tranchesHow is the market taking into account the basis between the Index and its undelyings? i.e if I sum up the 125 underlyings spreads I will not find the Index traded spread...So I was wondering what kind of CDS spread inputs is the market using for standard tranche pricing?Thanks!Dej
Taking into account index basis for base correl calibration
The CDS Spreads inputs have to be calibrated before they are fed into your CDO calculations. I believe there are several approaches to this so called spreads calibration. Dealers tend to make spread adjustments by balancing the spread 01s of the index and its constituents.ou can also use your CDO calculator to price the index with the raw spreads input. Then based on your "theoretical" index level computed from your CDO calculator, adjust the spread input until it matches the market observed one.