  This paper describes a consistent and arbitrage-free pricing methodology for
bespoke CDO tranches. The proposed method is a multi-factor extension to the
(Li 2009) model, and it is free of the known flaws in the current standard
pricing method of base correlation mapping. This method assigns a distinct
market factor to each liquid credit index and models the correlation between
these market factors explicitly. A low-dimensional semi-analytical Monte Carlo
is shown to be very efficient in computing the PVs and risks of bespoke
tranches. Numerical examples show that resulting bespoke tranche prices are
generally in line with the current standard method of base correlation with TLP
mapping. Practical issues such as model deltas and quanto adjustment are also
discussed as numerical examples.
