Title Date Europlace, March 28 th, 2008 Panel Session: New Challenges in Correlation Trading and Risk Management Benjamin Jacquard Global Head of Calyon Structured Credit Markets

2 Agenda 1.Market evolution 2.A Closer Look At Spreads & Base Correlation Moves 3.Correlation Trading and Risk Management Challenges

3 Market Evolution From slow deterioration to global re-pricing of risk A crisis across the credit activity spectrum 1

4 …And contagion on High Grade Correlation Investment Grade SS Tranches Spreads Investment Grade Spreads 1. Deterioration2. Acceleration3. Re-Pricing

5 A Closer Look At Spreads & Base Correlation Moves 2

6 IG Spreads

7 CDX 5Y Base Correlation Jun-07Aug-07Sep-07Mar-08

8 Lack of bid The Loss Fraction

9 Correlation Trading and Risk Management Challenges 3

10 Some new Trading challenges 1.High spread volatility: price should take into account the cost of rebalancing the hedges 2.As a consequence, for higher gamma tranches: the CDS replication strategy leads to more volatile results (mainly equities and super-senior). 3.Index calibration: fixed recovery assumption does not enable proper calibration with standard recovery levels (otherwise the capital structure is not arbitrage free anymore) 4.Extreme super-senior correlation levels lead to highly spread discriminant models and less appropriate delta

11 Trading challenges (2) spread The single name convexity for super-senior gets inappropriate for high correlation levels … (30% difference for a spread moving from 250 to 300…)

12 Models Today’s popular correlation models  Gaussian Copula  Gaussian Copula with Base Correlation  Random Factor Loading (RFL)  Parametric Models (RFL’s extension)  Strike equivalent methods for bespoke Challenges for future models :  Calibration of observed market levels (high super-senior spreads)  Better replication strategy with current spread volatility  Appropriate extension of the model to less observable bespoke portfolios Static models: No spread volatility input !

13 Discussion 1.What are the new challenges for market participants (as asset managers of bespokes) ? 2.What are the first «quick wins» to improve correlation trading risk management ? (recovery, macro scenarios …) 3.What are the medium term developments ? (models) 4.How scalable and practical are they ? 5.Others ………