Abstract

The purpose of the present contribution is to provide an extension to a model developed by Tassinari and Corradi [9] to price equity and debt tranches of a Collateralized fund of hedge fund Obligations. Since the value of every tranche depends on the evolution of the collateral portfolio during the life of the contract, the idea is to evaluate each CFO liability as an option on the underlying basket of hedge funds. The proposed model is able to capture skewness, excess-kurtosis in hedge funds’ log-returns distribution and to generate a more complex dependence structure than the linear one. At the same time, this new model can be calibrated to the empirical correlation matrix. Finally, the adopted approach allows to find explicit relations among physical and risk neutral processes and distributions at both marginal and joint level.