CFXOs are the latest example of collateralised volatility obligations to generate significant interest in the structured finance market, said Stefan Bund, a managing director at Derivative Fitch in London.
CFXOs use a structure similar to that of synthetic CDOs; the structural risks in a CFXO are similar to those in a synthetic CDO. However, the foreign exchange reference assets introduce new risk into the structure. Fitch’s quantitative analysis of forex reference assets is based on Monte Carlo simulation using asymmetric Garch processes with jumps to fit individual FX rates.
Ratings are assigned by ratings committee and the model results are only one input into the rating process. The ratings committee might want to look at scenario testing of factors such as the historical price movements of the forex rates in the portfolio, the correlation between these price movements, and structural features of the transaction, including the number and level of the FX triggers, outside the model.
Vector CFXO beta is available upon request by sending an e-mail to [email protected]
The week on Risk.net, July 7-13, 2018Receive this by email