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Subbadditivity

C

Cf92

Member
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.
 
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