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Hi all,What is the market standard for pricing synthetic CDO tranches based on a portfolio containing both long and short credits ?Do people somehow use a different correlation for the long and the short names ?Thanks

anyone ?cheers

Do you mean a CDO with a long portfolio AND a short portfolio, inside the CDO? How do you account for gains occurring in the short bucket, for example if a credit defaults in the short bucket?There is not a generally accepted pricing model on this. If the short is diversified enough, you can price the long bucket under a copula and the short bucket under another copula, and then link the two with yet another copula - probably you will need th calibrate the correlations between the long and the short bucket with a gaussian mixture or a random factor loading type of model, but I would not trust this ...

Thanks a lot.Yes, you have a long and a short portfolio inside the CDO. The "short" defaults simply reduce the number of "long" defaults.OK, I assumed you would need 3 copulas for this.Thanks for the insight, I thought there was a market standard for this. I will look into the gaussian mixture approach.Cheers.

Hi,By long and short, do you mean that you have a basket of credits and on some you're selling protection and on others you are buying protection? How exactly would the tranching of something like this work?Could you provide some more details?Thanks.