Cash Flow Optimization on Synthetic CDOs

Collateralized Debt Obligations are not as widely used
nowadays as they were before 2007 Subprime crisis. Nonetheless
there remains an enthralling challenge to optimize cash flows
associated with synthetic CDOs. A Gaussian-based model is used
here in which default correlation and unconditional probabilities of
default are highlighted. Then numerous simulations are performed
based on this model for different scenarios in order to evaluate the
associated cash flows given a specific number of defaults at different
periods of time. Cash flows are not solely calculated on a single
bought or sold tranche but rather on a combination of bought and
sold tranches. With some assumptions, the simplex algorithm gives
a way to find the maximum cash flow according to correlation of
defaults and maturities. The used Gaussian model is not realistic in
crisis situations. Besides present system does not handle buying or
selling a portion of a tranche but only the whole tranche. However the
work provides the investor with relevant elements on how to know
what and when to buy and sell.

• Timothée Bligny
• Clément Codron
• Antoine Estruch
• Nicolas Girodet
• Clément Ginet

• Synthetic Collateralized Debt Obligation (CDO)
• Credit Default Swap (CDS)
• Cash Flow Optimization
• Probability of Default
• Default Correlation
• Strategies
• Simulation
• Simplex.

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