Credit risk analysis of cashow CDO structures

We develop a method that o¤ers consistent and computationally e¢ cient credit risk analysis of cash‡ow CDO structures. The proposal makes use of simple portfolio models that admit semi-analytic representations of the loss distribution, combined with detailed and fast calculations of realistic interest and principal cash‡ow waterfalls. We de…ne in this context and study credit tranche risk measures such as the probability of loss and expected loss-given-default and the variance of the latter. We benchmark our approach against the stress-scenario based analysis favored by cash‡ow CDO market practitioners. ABN AMRO Bank, Group Risk Management, Models and Tools department yDisclaimer: The results, opinions and conclusions presented in this article re‡ect the personal opinion of the authors and not that of ABN AMRO Bank.