Fitch Ratings has released an updated version of its Nth-to Default Model, which comes just a few months after the original model was made available for those seeking a tool to evaluate risks associated with Nth-to-Default trades. Version 1.1 of the Nth-to-Default Model includes an updated algorithm for generating random numbers that greatly reduces the run time, Fitch said in a release.
Nth-to-Default trades are synthetic transactions where a credit event is triggered upon the first, second, third or Nth reference entity to default in a portfolio. The Nth-to-Default Model can assess the risk tied to such trades. For example, the model can predict how a possible credit event related to one bond defaulting can affect other bonds defaulting in the same portfolio, whether within the same industry or across industries.
The Nth-to-Default Model evaluates the risks in such transactions through a Monte Carlo simulation. In addition, the Nth-to- Default Model is based off the same simulation engine as the Fitch Default VECTOR Model - Fitch's primary tool for assessing default risk in portfolios that back collateralized debt obligations. The difference between VECTOR and the Nth-to-Default Model, however, is that with VECTOR, there is a distribution of all possible default events, while the Nth-to-Default model returns a very specific default probability.