Forward-Start CDO’s, Options on CDO’s, and Calibration

This article describes forward-start CDO’s (FCDO’s), options to start CDO’s, and their risk-neutral valuation. The valuation method represents an extension of previous work Walker (2005, 2006) on a static model for the valuation of ordinary CDO’s to a model containing the necessary dynamics. The focus of the work will be to develop a model with sufficient flexibility that it can be used to calibrate simultaneously to a reasonably wide range of prices for ordinary CDO’s, FCDO’s and options on CDO’s in terms of a single risk neutral measure. JEL classification code: G13 keywords: forward-start CDO’s, FCDO’s, options on CDO’s, calibration