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.