Pricing credit derivatives

SciComp offers two solutions for pricing credit derivatives, SciFinance and SciCMD.

SciFinance is an automated coding technology for rapidly developing derivatives pricing and risk models. SciFinance models can be created by simply modifying one of hundreds of model templates provided with the system or by writing a model specification comprised of arbitrary partial differential equation (PDE) or stochastic differential equation (SDE), numerical algorithms and the use of key words. SciFinance does the rest by automating the programming task via the SciPDE and SciMC modules to produce fully documented C/C++ source code or Excel spreadsheets and add-ins.

SciCMD meets the needs of users looking for "off-the-shelf" pricing and risk models as well as those seeking a customized model approach that captures particular instrument features and modeling needs. SciCMD models are state-of-the-art pricing and risk models comparable to those found on the desks of traders and risk managers within Tier-1 financial organizations. Like SciFinance, SciCMD supports the modeling of any financial instrument that can be priced using a PDE or SDE and the deliverable may include a ready-to-use Excel add-in or C/C++ source code pricing library.

SciComp's modeling flexibility and transparency provides:

• Support for any interest rate derivative (including sensitivity to any model parameter) that can be priced using a PDE or SDE
• Support for both market standard and proprietary pricing models
• Robust calibration routines
• Pricing model C/C++ source code

Pricing models for credit derivatives

• Reduced form approaches
  • CIR / Vasicek / Ho Lee / Hull White
  • Arbitrarily user defined
• Structural approaches/Firm value models
  • Merton’s corporate debt model
    • Zhou’s jump extension
  • First passage time models
    • Black & Cox / Briys & deVarenne
  • Lipton’s jump diffusion
  • Hybrid ‘credit indices’ and survival probabilities
    • Hull & White
    • Avalleneda & Zhu
  • Multi factor models
  • Implicit joint dependence
    • Structural models
    • Reduced form models
  • Copulae in Monte Carlo
    • Normal copulae
    • Student-t copulae
    • Factor copulae
    • Implementations
      • Inverse cumulative distribution method
      • Threshold simulation method
  • Semi-analytic method of Andersen, Sidenius and Basu
  • Large Pool Base Correlation

Pricing model calibration

SciCalibrator is an automated coding technology for translating calibration specifications into C/C++ source code calibration routines and ready-to-use, standalone Calibration Spreadsheets.

Calibration routines for credit derivative models include:

• Survival probabilities and hazard rates from credit spreads
• Base correlation calibration
• Semi-analytic calibration for deterministic factor loading
• Semi-analytic calibration for stochastic factor loading

Credit derivative structures

Given that SciComp solutions support the modeling of any credit derivative that can be priced with a PDE or SDE and no list can be complete (partial list below).

Examples of credit derivatives:

Single name credit derivatives:

• Default bonds
• Options on defaultable bonds
• Credit default swap (CDS)
• Credit default swap options
• Credit linked notes
  • American/Bermudan exercise
  • Range accrual structure
• Credit spread options
• Puts on defaultable bonds
• Exchange options

Basket structures:

• Nth to default options and swaps
• Collateralized debt obligations (CDO)
• Cash collateralized debt obligations (CDO)
• Synthetic collateralized debt obligations (CDO)
• CDO squared (CDO^2)
• Collateralized loan obligations (CLO)