Analytical Approximation Method of Collateralized Debt Obligation Pricing in One-Factor Models

To reduce the complexity of fair spread computation in consideration of random loss given default, an analytical approximation method for collateralized debt obligation (CDO) pricing in one-factor model is proposed by modifying the approximation of portfolio loss distribution of (O. Vasicek, 1991). By comparing the results obtained by the proposed method with the approximation of CDO pricing based on the extended Vasicek model (O. Vasicek, 1991) and one of the analytical methods of (J. Hull and A. White, 2004), it is found that the analytical approximation method proposed in this article produces satisfactory results under large number of assets.