Let's jump together: pricing credit derivatives

Joao Garcia, Serge Goossens, Wim Schoutens
01 Sep 2008

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Two recent innovations in the credit derivatives market are constant proportion portfolio insurance (CPPI) and constant proportion debt obligations (CPDOs). The invested capital is put in a risk-free bond and a position is taken on credit derivatives. In CPPI, the principal is guaranteed at maturity and the goal is to maximise the portfolio value. In a CPDO, the target is a significant excess return over the risk-free rate, subject to the constraint of being highly rated.

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