Structured Securities Simulations

Overview

when modeling a pool of assets in a structured security, there are several variables about the future outcomes of the pool that are unknown.

• Future Interest Rates - future interest rates most directly impact the payments made by floating rate assets in the pool, however, they are correlated with pre payments and (sometimes) defaults.
• Pre-payments - which assets will pre-pay their balances and when is unknown, but is typically highly correlated with future interest rate curves.
• Defaults - some assets will default.

In order to understand how the structure will perform, it is often necessary to model it under various future scenarios. These scenarios can be chosen by the modeler, or generated using Monte Carlo Simulations.