Statement 1: A common trade during 2004 and 2005 was to sell protection on the equity tranche
and buy protection of the mezzanine tranche of the CDX.NA.IG index.
Statement 2: The trade was long credit spread risk on the equity tranche and short credit
spread risk on the mezzanine tranche.
please help me in resolving the following confusion:
When we find correlation in CDS, I understand following :
high correlation makes senior tranches (i.e., high n to default for basket CDS) more expensive (all other things equal) and junior tranches (e.g., 1st to default) less...