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For CLOs, CDOs kind of security, how can I build a cashflow model when the tranche supporting structure is very complex. For example:

After tranche A is paid, the amount going to B is going to depend on balance of tranche B, C, D. What would be algorithm to generic code to determine the percentage of money going to each tranches? (I have thought of graph search algorithms like BFS and DFS, but am not getting an idea)

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The algorithm shall handle even creasier situations like:

enter image description here

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  • $\begingroup$ Can you add more details? Vertical axis is payoff seniority, horizontal axis tranche width? Are the tranches paid off pro rata? If that is the case then in picture 1, naively, I'd say that you could split B into B1 and B2, where B1 and C are paid off pro rata, and then B2 and D. $\endgroup$ Mar 18, 2022 at 7:28
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    $\begingroup$ This is a perfect example where you can apply the code and method discussed and presented in Winchie and Smith:amazon.com/Cash-CDO-Modelling-Excel-Approach-ebook/dp/… I built a Cash CDO in Excel with various tranches and fundings some years ago using this book. If you decide to buy it please make sure that the CD with the VBA and Excel files is included as the pieces of code and references to excel cells in the book are useless otherwise)..Maybe it will help you..? $\endgroup$
    – T123
    Mar 18, 2022 at 9:46
  • $\begingroup$ @Kermittfrog it shall follow the general principal of structured securities. My question is really about how to figure out the way to split B into b1 and b2. Doing it manually is not hard, but figuring out the structure by program is confusing for me. $\endgroup$
    – Daniel
    Mar 19, 2022 at 17:43
  • $\begingroup$ @T123 Thanks. I will check it out $\endgroup$
    – Daniel
    Mar 19, 2022 at 17:43
  • $\begingroup$ @Daniel yes, I think it will definitely help you. Usually these are waterfall structures where the next tranche will be served as soon as the previous tranche payments are met and several oc and ic tests plus eventually some irr thresholds are passed. How to build it is written in this book. If you like I can post the scheme as an answer.. $\endgroup$
    – T123
    Mar 19, 2022 at 18:36

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