27.16 Valuation Must use monte carlo simulation Each reference entity is simulated to determine when if ever it defaults Valuation is sensitive to default correlation A conservative(and easy) assumption for the seller is that all correlations are zero The easiest way to build in non-zero correlations is with the Gaussian copula model Options, Futures, and other Derivatives, 5th edition 2002 by John C. HullOptions, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 27.16 Valuation • Must use Monte Carlo simulation • Each reference entity is simulated to determine when if ever it defaults • Valuation is sensitive to default correlation • A conservative (and easy) assumption for the seller is that all correlations are zero • The easiest way to build in non-zero correlations is with the Gaussian copula model