This thesis addresses an appropriate model for the valuation of collateralized debt obligations (CDOs) traded in Korea. In determining the fair market value of CDO, evaluating default probability density and default correlations is an important task. This thesis is using the framework of Hull and White (2000) model, which provides a methodology for valuing credit default swaps and credit basket swaps. This study simulates correlation risk based on Zhou (2001)’s first passage time model. Also, as a reference, this study implements Moody’s diversity score methodology.
As a result, in the case of CDO, the Hull and White (2000) model and the diversity score method seemed to be appropriate for pricing traded in Korea or abroad. But, both two models overvalued market prices with lower default correlation and lower joint default probability. We test the sensitivity of CDO prices to assumptions about input datum in diversity score method.
