Do Not Forget the Cancellation - Marking-to-Market and Hedging LCDX Tranches

5 Pages Posted: 19 Mar 2009

See all articles by Péter Dobránszky

Péter Dobránszky

BNP Paribas, Risk - Investment & Markets; Catholic University of Leuven (KUL), Department of Mathematics

Wim Schoutens

KU Leuven - Department of Mathematics

Date Written: March, 18 2009

Abstract

Although market is busy today working on the bullet LCDS contract to remove the cancellation feature from syndicated secured loan derivatives, in their current form LCDSs and LCDX tranches are still exposed to the cancellation risk. Until recently, in lack of proper modelling framework, market practitioners neglected the cancellation risk and they priced and hedged these products as simple CDSs and CDO tranches. However, cancellation risk does matter! Especially in the current market situation. As we show here, it is more than important to take into account the cancellation risk while marking-to-market and hedging syndicated secured loan derivatives. For this purpose, we present here an easy and robust way to model the cancellation.

Keywords: cancellation risk, bullet LCDS, LCDX, tranche pricing, marking-to-market, hedging, one-factor models, base correlation, L¿vy copulas, stochastic recovery

JEL Classification: G10, G12, G13, G15, G20, G21

Suggested Citation

Dobránszky, Péter and Schoutens, Wim, Do Not Forget the Cancellation - Marking-to-Market and Hedging LCDX Tranches (March, 18 2009). Available at SSRN: https://ssrn.com/abstract=1364295 or http://dx.doi.org/10.2139/ssrn.1364295

Péter Dobránszky (Contact Author)

BNP Paribas, Risk - Investment & Markets ( email )

Montagne Du Parc 3
Brussels, 1000
Belgium

Catholic University of Leuven (KUL), Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, 3001
Belgium

Wim Schoutens

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

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