R
r_v.s
Member
In the additional reading section on the IFoA, I came across a doc on credit derivatives. In the section about impact of implied correlation on the various tranches, there is an illustration for 3 tranches and various values.
It shows, the super senior tranche reduces in value when the implied correlation increases, that I can understand.
But it says the spread payable n equities decreases as correlation increases. I thought that should be the other way round too!!
My understanding was this ...if correlation in the collateral portfolio increases, the probability of joint defaults would increase, hence more risky the various tranches that are backed by this collateral portfolio.
Now what do they mean by spread payable on equities? How does that reduce when correlation rises?
It shows, the super senior tranche reduces in value when the implied correlation increases, that I can understand.
But it says the spread payable n equities decreases as correlation increases. I thought that should be the other way round too!!
My understanding was this ...if correlation in the collateral portfolio increases, the probability of joint defaults would increase, hence more risky the various tranches that are backed by this collateral portfolio.
Now what do they mean by spread payable on equities? How does that reduce when correlation rises?