Hull & White publish new credit swaption model

Well known academics John Hull and Alan White have recently published a paper outlining a model for valuing forward-starting synthetic CDOs and options on tranches. According to the abstract, the model has similarities to the standard market model for valuing European swap options and to the model for valuing options on credit default swaps. Once default probabilities, recovery rates and clustering of defaults have been estimated, it enables traders to calculate option prices from CDO tranche swap spread volatilities and vice versa.

Source: Rotman School of Management