The question of how to value structured credit products has never been more urgent.

This multi-contributor book successfully brings together cutting-edge, current research from a broad spectrum of leading academics and practitioners in the field to fully examine CDOs and provide expert practical guidance.

The Definitive Guide to CDOs will deliver, to both practitioners and academics, the full range of current ideas and the newest innovations surrounding this important topic. It provides you with all the essential analysis concerning the CDO sector including:

• A comprehensive overview of the market and application of CDOs, which will help the less experienced reader get up-to-date on the subject.
• An analysis of the severe 2005 and 2007 CDO crises.
• A clear picture of the current status of the market.
• A technical overview of CDO hedging approaches.
• An analysis of the current CDO valuation approaches, such as the One-Factor Gaussian Copula Model, Copula extensions, Levy processes, Markov Models, as well as CDO squared and CPDO valuation.
• Insight into the risks, challenges and market outlook.

Recommended reading for anyone trying to stay ahead in the rapidly changing CDO market, including CDO investors and analysts, brokers and dealers, investment bankers, accountants, asset managers, collateral managers, credit enhancers, portfolio managers, trustees, structurers and risk managers.

Introduction
Gunter Meissner

SECTION 1: THE CDO MARKET AND APPLICATION
Introduction

1 The Evolution of CDOs – From the Bistro to CDO2
Brenda Boultwood; Gunter Meissner
JP Morgan; University of Hawaii, NYU and Derivatives Software

2 The Application of CDOs
Gunter Meissner
University of Hawaii, NYU and Derivatives Software

SECTION 2: BASIC PROPERTIES OF CDO VALUATION
Introduction

3 An Overview on Copula Function Methods in Credit
Portfolio Modelling
David Xianglin Li
China International Capital Corporation Limited

4 The Underlying Dynamics of Credit Correlations
Arthur Berd; Robert Engle; Artem Voronov
Capital Fund Management; Stern School of Business,
New York University; Millgate Capital

5 Dynamic Conditioning and Credit Correlation Baskets
Claudio Albanese; Alicia Vidler
Level 3 Finance; Merrill Lynch

6 Approaches to Generate the Loss Distribution
Peter Grundke; Thomas Moosbrucker
University of Osnabrück; Deloitte & Touche GmbH

7 Modelling Non-Normal CDO Returns with the Omega
Function
Ranjan Bhaduri; Gunter Meissner
AlphaMetrix, World Trade University; University of Hawaii,
NYU and Derivatives Software

SECTION 3: CDO VALUATION APPROACHES
Introduction

8 The Market Standard Model for Valuing CDOs, the One-Factor
Gaussian Copula Model – Benefits and Limitations
Gunter Meissner
University of Hawaii, NYU and Derivatives Software

9 Practical Pricing of Synthetic CDOs
Jon Gregory; Jean-Paul Laurent
SS Consulting; Université de Lyon, Université Lyon 1,
ISFA Actuarial School, and BNP Paribas

10 Factor Models for CDO Pricing
Leif Andersen, Victor L. Piterbarg
Banc of America Securities

11 Lévy Processes for the Valuation of CDO Tranches
Thomas Moosbrucker
Deloitte & Touche GmbH

12 Markov Models for CDOs
Erik Schlögl
University of Technology, Sydney

13 CDOs2: Time for an Autopsy?
Michiko Whetten
UBS Securities Japan

14 Constant Proportion Debt Obligations: An Introduction
Martin Hellmich; Stefan Kassberger
DekaBank; Ulm University

15 A Comparative Analysis of CDO Pricing Models
Xavier Burtschell; Jon Gregory; Jean-Paul Laurent
BNP Paribas; SS Consulting; Université de Lyon, Université
Lyon 1, ISFA Actuarial School and BNP Paribas

16 CDO Valuation: Fact and Fiction
Robert A. Jarrow; Li Li, Mark Mesler, Donald R. van Deventer
Johnson Graduate School of Management, Cornell University
and Kamakura Corporation; Kamakura Corporation

SECTION 4: HEDGING OF CDOs
Introduction

17 Hedging Issues for CDOs
Areski Cousin; Jean-Paul Laurent
Université de Lyon, Université Lyon 1, ISFA Actuarial School;
Université de Lyon, Université Lyon 1, ISFA Actuarial School
and BNP Paribas

18 Hedging CDOs in the One-Factor Gaussian Copula Framework
Gunter Meissner; Richard Hector, Thomas Rasmussen
University of Hawaii, NYU and Derivatives Software; Hawaii
Pacific University

SECTION 5: RATING APPROACHES, REGULATORY ISSUES AND MODEL VALIDATION
Introduction

19 A Comparative Analysis of Fitch’s, Moody’s and
Standard & Poor’s CDO Rating Approaches
Gunter Meissner; Tim Garnier, Tobias Laute
University of Hawaii, NYU and Derivatives Software; Hawaii
Pacific University

20 The Treatment of CDOs in Basel II
Martin Brodka, Linda Urban
Lehman Brothers

21 Counterparty Credit Risk of CDO Tranches under Basel II
Niall Whelan
Scotiabank

22 Model Validation and CDOs – An Overview of Requirements
And Methods
George Neal
American Savings Bank

SECTION 6: CDOS – RISKS, CHALLENGES AND MARKET OUTLOOK
Introduction

23 CDOs – Risks, Challenges and Market Outlook
David M. Rowe, Cyril Deretz
SunGard

Index

After a lectureship in mathematics and statistics at the Economic Academy Kiel, Gunter Meissner PhD joined Deutsche Bank in 1990, trading interest rate futures, swaps and options in Frankfurt and New York. He became Head of Product Development in 1994, responsible for originating algorithms for new derivatives products, which at the time were Lookback Options, Multi-asset Options, Quanto Options, Average Options, Index Amortizing Swaps, and Bermuda Swaptions. In 1995/1996 Gunter Meissner was Head of Options at Deutsche Bank Tokyo. From 1997 to 2007, Gunter was Professor of Finance and Hawaii Pacific University. Currently, he is President of Derivatives Software, Adjunct Professor of Mathematical Finance at NYU and Director of the Master in Financial Engineering program at the Shidler College of Business at the University of Hawaii.

Gunter Meissner has published numerous papers on derivatives in international journals. He is author of 3 books, including Credit Derivatives: Application, Pricing, and Risk Management (2005).