New techniques are introduced for pricing nth to default credit swaps and tranched CDOs in the Li model. We demonstrate the use of importance sampling to greatly increase the rate of convergence of Monte Carlo simulations for pricing. This technique is combined with the likelihood ratio and pathwise methods for computing the sensitivities of these products to changes in the hazard rates of the underlying obligors. In particular, the extension of the pathwise method has wider significance in that it is shown that the method can be used even when the pay-off is discontinuous.

Presentation

• Powerpoint presentation: Mark_Joshi_29sep04.ppt

Please feel free to bring this to the attention of interested colleagues.