Estimating CDO Expected Losses via a Monte Carlo Simulation

Estimating CDO Expected Losses via a Monte Carlo Simulation

• The model illustrates the mechanics of a CDO transaction  ;
• Starting from PD, EAD, and LGD at the loan level, one simulates the Expected Loss per CDO tranche ;
• Since the Monte Carlo simulation requires a random factor, one uses a dedicated built-in function. A robustness check is performed to cross-check the randomness of the factor ;
• A brief methodology is available in the spreadsheet.