Dear all, i have a following question. Let's suppose I am pricing one of standardized tracnhes of ITRAXX. I impose Gaussian structure, assume equal spreads, constant correlations etc-all the regular assumptions. I get the price at the end. How do I verify if it is a "right" price?

The "right" price is the market price. Your model should fit it by implying correlation from price (really, base correlation).

Thanks, mikeoz.so, given only the quoted base correlation and using this correlation as an input in the model I should arrive to the spread equal to the one quoted on the street in all the situations?I understood correctly?

Given what correlation? If you are referring to corrs quoted by dealers, you probably won't get to the market price using those unless you plug it into the exact same model that generated it in the first place. Unlike B-S implied vols which are a standard quotation method in some markets, corrs are just an output of the model. The models aren't standardized across the marketplace, so it makes little sense to use somebody elses corr in yours.

StructCred,following your logic, dealers quote base correlations only for personal entertainment?And there is no sense in using it to price standardized tranches although this correlation parameter is "market consesus"?People,jokes aside,using HLPGC model and given a base correlation quote I should arrive to dealer's spread?

SC is quite correct. You need to take the dealer's spreads and your model and back-out your own base correlation values. They won't be particularly close to the dealer's base correlations.Base correlation is primarily an interpolation tool to price non-standard tranches.

So, unless I know precisely the model used by the dealer and his inputs, there is no way I can verify if my computations are correct. This is depressing.

Besides, dealer's price can be affected by consitution of his correlation book?For example, concentration of junior risk will make him quote higher spread/lower correlations? Is there any method to get rid of this abandoned information in the price?

Dealers quote correlations because investors ask them to. A few years back, some dealers actually refused to quote corrs after being asked once too many times why their numbers are different from those quoted by dealer X. As far as dealers position skewing the quote, it would be hard to account since you'll need to know their position. The impact should be rather small these days, since the market is too liquid for a dealer to skew it by much. Besides, does it matter? Take a best bid and best offer you see in the market and use those levels - they are what you can trade at.

Thank you for the help and info,SC!The reason for me being so "*nal" about this is that my Thesis superviser wants to know how I will verify it. Consequently, the whole commission also wants to know. And this fact poses a problemHowever, now I have some strong arguments to support my reasoning. Thank you all for the help once again.