System and methods for valuing and managing the risk of credit instrument portfolios

A calibration engine for use in a system for valuing and managing the risk of a plurality of credit instruments, said calibration engine comprising:

• a) a first module for generating a plurality of basis instruments from input data relating to said plurality of credit instruments, wherein said input data comprises at least one of prices, ratings, sectors, and terms and conditions;
• b) a second module for generating a first term structure of risk-free zero prices and a risk-neutral process for interest rates from said plurality of basis instruments;
• c) a third module for generating one or more basic spread matrices from said plurality of basis instruments and said first term structure of risk-free zero prices;
• d) a fourth module for generating a second term structure of risk-neutral transition matrices and at least one smoothed credit spread matrix using said first term structure of risk-free zero prices, said module also adapted to develop generators using a transition matrix manager;
• e) a fifth module for generating a third term structure of risk-neutral transition matrices for a specific named obligor from said at least one smoothed credit spread matrix, said first term structure of risk-free zero prices, and said second term structure of risk-neutral transition matrices;
• and
• f) a sixth module for generating a plurality of spread volatility matrices.

A pricing engine for use in a system for valuing and managing the risk of a plurality of credit instruments, said pricing engine comprising:

• a) a first module for defining a state space;
• b) a second module for generating a state space by modeling the underlying economic behavior driving the exercise of embedded options and other structural features of said plurality of credit instruments;
• c) a third cash flow generation module for generating cash flows for said plurality of credit instruments, whereby said credit instruments may be subject to different prepayment or credit state assumptions;
• and
• d) a fourth module connected to said third cash flow generation module for generating a plurality of valuation attributes from said generated cash flows.