Julius Preps Credit Derivative Analysis Tool

Dubbed JuliusOne, the product will deliver independent valuations and identify risk in client portfolios by simulating defaults by companies in the CDX and iTraxx indexes by calculating the value of those companies at the time they default on a hypothetical future date, says Peter Cotton, chief executive of Julius Finance. Clients can verify a valuation by examining the supporting data and averaging the present value of cash flows for all scenarios, he says.

JuliusOne determines the "time of default" value of those companies using scenarios tailored to the specific type of CDS deal that imply cash flows for both sides of a credit derivative trade, Cotton says. For example, in a single obligor CDS, "premium payments will continue until the time of default, and the credit event payments only occur if said obligor defaults," he says.

"The more complicated the credit derivative, the more work must be done to compute the cash flows for each scenario," Cotton says. "The difficulty lies in generating the scenarios... because the model used to produce these scenarios must satisfy thousands of constraints imposed by market prices."

Cotton says the vendor is likely to extend the information contained in the scenarios to include companies' future CDS spreads and future ratings, which tend to be downgraded prior to a default, and recovery values of companies at the time of their default.

JuliusOne will also be used to value bespoke synthetic CDOs and companies that structure and trade credit derivatives, as well as to value CDO-squareds (CDOs comprised of other CDOs) and CDO- cubeds (CDOs of CDO-squareds), and for a variety of analyses, including estimating tail risk in a portfolio of CDSs or analyzing static hedges.

Cotton says JuliusOne can accept datafeeds from a range of sources, and will source CDS data from credit data provider Credit Market Analysis, which Julius Finance partnered with earlier this year (IMD, May 19), and from other data vendors with whom the company is currently in negotiations. Julius Finance can also integrate clients' proprietary data in the form of CSV, XML or flat files, and through direct interfaces to clients' databases.