Securitization Market in India & Analysis of Structured Products

Abstract

This Working Paper is divided into primarily three parts –  Overview of securitization market in India  Pricing of MBS using Monte Carlo Simulation on MATLAB  How does the market value equity tranche of a CDO The pricing of MBS pass through certificate was done using G2++ model and the implementation was done using MATLAB.The Hull/White 2‐factor model is equivalent to the G2++ model by Brigo and Mercurio .We have tested our model on securities issued by The Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac, and The Federal National Mortgage Association, commonly known as Fannie Mae, and observed encouraging resultson comparing model predicted prices and market traded prices. We have tried to analyse of market values a toxic asset like CDO equity tranche. Theoretically, CDO equity tranche should be similar to a bank stock as both have residual claims on a portfolio of loans. In this paper we have tried to test this hypothesis and based on the results come to a conclusion that indeed there is a high correlation between the two.