The CDO Engine* is a standalone JAVA application that can rate the tranches of any kind of structured debt Collateralized Debt Obligation based on the current performance of its underlying assets. Actual security performance is provided by ABSTRAK(R) and the Waterfall Editor(C) API. The user can choose the Clayton Copula, which links the analysis to a macro-economic event, or the market-conventional Gaussian Copula approach, to analyze the impact of portfolio correlations.
The process works by two distinct steps:
- The current credit quality of the pool is first determined based on updated ratings—not the credit quality implied in the original closing-date ratings.
- The CDO liabilities are valued in real-time using the prior step.
CDO Engine Workflow Diagram
*Technical Basis: R&R’s nonlinear convergence technique ensures transaction sustainability. The technique is grounded in Stefan Banach’s Fixed Point Theorem (1922). It guarantees that a fixed point in yield space will exist under conditions whereby the mapping system is hyperbolic, so that the yield space map is contractive and the deal is well posed. Use of this technique excludes ill-posed transactions before they blow up. For more details on nonlinear convergence, see Elements of Structured Finance, chapter 13 and 22.
Please contact R&R by email (info@creditspectrum.com) or by phone (+1-212-867-5693) if you want more details about the CDO valuation algorithm.
