Titre de la pr

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Europlace, March 28th, 2008
Title

• Date

Panel Session New Challenges in
Correlation Trading and Risk Management Benjamin
Jacquard Global Head of Calyon Structured Credit
Markets
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Agenda

• Market evolution
• A Closer Look At Spreads Base Correlation Moves
• Correlation Trading and Risk Management
  Challenges

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Market Evolution From slow deterioration to
global re-pricing of risk A crisis
across the credit activity spectrum
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And contagion on High Grade Correlation
1. Deterioration
2. Acceleration
3. Re-Pricing
Investment Grade Spreads
Investment Grade SS Tranches Spreads
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2
A Closer Look At Spreads Base Correlation
Moves
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IG Spreads
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CDX 5Y Base Correlation
Jun-07
Aug-07
Sep-07
Mar-08
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The Loss Fraction
Lack of 22-100 bid
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Correlation Trading and Risk Management
Challenges
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Some new Trading challenges

• High spread volatility price should take into
  account the cost of rebalancing the hedges
• As a consequence, for higher gamma tranches the
  CDS replication strategy leads to more volatile
  results (mainly equities and super-senior).
• Index calibration fixed recovery assumption does
  not enable proper calibration with standard
  recovery levels (otherwise the capital structure
  is not arbitrage free anymore)
• Extreme super-senior correlation levels lead to
  highly spread discriminant models and less
  appropriate delta

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Trading challenges (2)
The single name convexity for super-senior gets
inappropriate for high correlation levels (30
difference for a spread moving from 250 to 300)
spread
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Models

• Todays popular correlation models
• Gaussian Copula
• Gaussian Copula with Base Correlation
• Random Factor Loading (RFL)
• Parametric Models (RFLs extension)
• Strike equivalent methods for bespoke
• Challenges for future models
• Calibration of observed market levels (high
  super-senior spreads)
• Better replication strategy with current spread
  volatility
• Appropriate extension of the model to less
  observable bespoke portfolios

Static models No spread volatility input !
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Discussion

1. What are the new challenges for market
   participants (as asset managers of bespokes) ?
2. What are the first quick wins to improve
   correlation trading risk management ? (recovery,
   macro scenarios )
3. What are the medium term developments ? (models)
4. How scalable and practical are they ?
5. Others