Payback-backed Securities In China:a Framework For Pricing And Risk Factor Analysis

We can view Payback-backed security(PBS)as sort of a hybrid feature of options,CDO tranches and corporate bonds but different from them.Its cash flows follow a "waterfall" structure likes CDO,the underlying risk is the delay of payments rather than the credit risk of defaults;their trading volumes have already reached an all-time high,however,the underlying risk involved has not been fully investigated in details,and determining the prices of these exotic derivatives at current stage is usually through negotiations.We try to provide a simplified prototype to understand the main structure and key elements involved,and then we will provide the pricing model framework.The payoff functions are complicated,so no analytic formula for the price exists,and we have to rely on Monte Carlo simulation After pricing,we want to know how the mean,variance as well as the skewness affect the price.Our results firstly show the pricing model we have established is effective.Secondly,the change of the mean/variance/skewness has the same effect on the initial fair price,and the initial fair price will decrease with the increase of them.Thirdly,the correlation between the underlying assets has a great influence on the initial fair price,when the correlation is enhanced,the initial fair price of the senior and mezzanine tranche will decrease while the initial fair price of the equity tranche will grow in the opposite direction.Finally,due to the stratification of tranches,the risks of tranches are different.So the impact of senior tranche is the smallest while the impact of equity tranche is the biggest.