Giant First Loss Model

Compared to the standard first loss model with the same collateral pool and tranche structure, the new model predicts smaller B/E spreads for each tranche. Further, it is more sensible to the interest rate and the sensitivity to the interest rate term structure changes dramatically. The B/E spreads for each tranche calculated by both models converge when the hazard rates of the obligors become very small.

https://ia904707.us.archive.org/3/items/arrearQuantoCMS/arrearQuantoCMS.pdf

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