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Derivatives

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  • 1088
  • February 17, 2022
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Compound Correlation

The correlation value that is implied from the market price of a tranche of a specific collateralized debt obligation (CDO). This value is typically derived by inverting the pricing formula (one-factor Gaussian copula) in order to match the market price of a given tranche (CDO tranche). Mathematically, for a given CDO tranche with attachment points K1, K2 and quoted premium SK1,K2, if GK1, K2 (S, ρ) is the model price (based on one-factor Gaussian copula, the parameter ρ (rho) will satisfy the following equation:

GK1, K2 (SK1, K2, ρ) = 0


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