Financial Instruments Toolbox

Credit and Mortgage Instruments

Credit Default Swaps and Swaptions

Financial Instruments Toolbox includes functions to price credit derivatives such as new and existing credit default swap (CDS) agreements and credit default swaptions. You can value running spread CDS contracts that do not have upfront payments and standard spread contracts that require an upfront payment.

The toolbox simplifies common CDS valuation tasks. You can:

  • Estimate the default probability term structure by bootstrapping CDS market data
  • Price new CDS contracts by calculating the breakeven spreads for multiple maturity dates and recovery rates
  • Calculate the mark-to-market value of a CDS contract with either accrued or no accrued premium payment
  • Convert between market quotes using running spreads and contracts valued using upfront payments and standard spreads

Mortgage-Backed Securities, Mortgage Pools, and Collateralized Mortgage Obligations

Financial Instruments Toolbox lets you model generic fixed-rate mortgage pools and balloon mortgages. The toolbox provides tools to calculate price and yield of mortgage-backed securities (MBS) using prepayment options derived from uniform practices of the Public Securities Association (PSA). You can calculate the mortgage-pool price or effective duration using the option adjusted spread method for your mortgage pool. Additionally, you can measure the risk for a mortgage-pool portfolio using convexity, duration, and average life calculations.

The toolbox provides functions to calculate price, yield, and spreads for collateralized mortgage obligations (CMO) and tools for scheduling cash flows between tranches. Supported schemes for prepayment tranches are:

  • Sequential tranching, with or without Z-bond tranching
  • Schedule bond tranching, both planned amortization class (PAC) bonds and target amortization class (TAC) bonds
Plots of mortgage pool monthly cash flows and mortgage balance for two conditional payment rates.
Plots of: mortgage pool monthly cash flows (left) and mortgage balance for two conditional payment rates (right).

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