Quantifi, a leading provider of analytics and risk management solutions to the global credit markets, 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.
Recent market turmoil has led to significant 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.
In response to this market need, Quantifi has developed a new model for pricing CDOs called the Quantifi Correlated Recovery model (QCR) which extends the one-factor Gaussian copula model to incorporate more realistic treatment of recovery in the event of default.
The QCR model allows participants to calibrate and price even during periods of extreme market turmoil. In addition the QCR model more accurately prices senior tranches while providing improved sensitivities including solving the ‘negative delta’ problem.
"The Correlated Recovery Model is a new class of CDO model which has generated a lot of interest from banks and other leading market participants. Quantifi is first-to-market with an innovative, highly optimized, and robust implementation which keeps our clients on the forefront of the latest developments in pricing and risk managing credit derivatives," says Rohan Douglas, founder and ceo of Quantifi. "During times of rapid market innovation and change, being responsive and first to market is even more important to our clients," he added.
The Quantifi Correlated Recovery Model is available in Version 9.1 of Quantifi RISK, Quantifi Toolkit, and Quantifi XL.