Hi there I was struggling to grasp one of the subbadditivity qs that's in the x assignment. Why in the x assignment x2.6 does it aggregate the losses and then subtract 500. I managed to do the September 2011 q8 which was similar, is there something fundamental I'm missing in the x assignment? Thanks
If a bond defaults, you lose the capital and the coupon (a loss of 105). If a bond survives, you gain the coupon of 5 (ie a "loss" of -5). We have 100 bonds, hence the -500. We are effectively measuring the loss against the total nominal value of the bonds, not the expected position of all bonds surviving and paying their coupons.
