09 September 2008 Company Announcements

 

Quantifi announces correlated recovery model for pricing CDOs

Quantifi says that it has extended the functionality of its credit derivative valuation software to include a new correlated recovery model allowing calibration to a wider range of tranche prices than the traditional one-factor Gaussian copula model.

The company notes that recent market turmoil has led to challenges for the pricing and risk management of synthetic CDOs - widening and more volatile spreads have caused some simple Gaussian copula models to fail, leaving market participants unable to price or hedge accurately.

Quantifi has developed a new model for pricing CDOs called the Quantifi Correlated Recovery model (QCR) which is designed to extend the one-factor Gaussian copula model to incorporate more realistic treatment of recovery in the event of default.

The QCR model should allow participants to calibrate and price even during periods of extreme market turmoil. In addition the QCR model is intended to price senior tranches more accurately while providing improved sensitivities including solving the 'negative delta' problem.