Pricing fixed income securities using copulae

Abstract

The rapidly growing credit derivatives market allows corporate and financial institutions to efficiently transfer and manage their credit exposures by repackaging their credit exposures and trading them in the secondary market. Collaterised Debt Obligation or CDOs, as we know them, is one of the widely used products to reduce credit exposure1. CDOs are securities, backed by assets generating revenue streams like sovereign or corporate bonds, residential and commercial mortgages and other kinds of loans.