Quantum computation for pricing the collateral debt obligations

The CDO tranche structure.

Collateral Debt Obligation (CDO) has been one of the most commonly used structured financial products and is intensively studied in quantitative finance.

By setting the asset pool into different tranches, it effectively works out and redistributes credit risks and returns to meet the risk preferences for different tranche investors. The copula models of various kinds are normally used for pricing CDOs, and the Monte Carlo simulations are required to get their numerical solution.

A Chinese team of researchers at Center for Integrated Quantum Information Technologies (IQIT) and University of Science and Technology of China has implemented two typical CDO models, the single-factor Gaussian copula model and Normal Inverse Gaussian copula model.

By applying the conditional independence approach, they have managed to load each model of distribution in quantum circuits. They have applied quantum amplitude estimation as an alternative to Monte Carlo simulation for CDO pricing.

They demonstrated the quantum computation results using IBM Qiskit.

This work addresses a useful task in finance instrument pricing, significantly broadening the application scope for quantum computing in finance.

You can read the paper there.