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Hi David

While evaulating portfolio credit risk (in the sense of all the credit models), the concept is that higher positive correlations leads to higher portfolio risk, and negative corrleations lower portfolio risk.

Now when you consider a basket CDS where the reference asset is a basket of debt securities, the logic is inverted. Higher correlations actually lower the swap premium and vice versa.

The question is: Swap premiums (for either the 1st to default or N to default) are based on the number of defaults taken individually or taken as group? If correlations are high, then if one

asset defaults (in a nth to default) the nth default will be reached quickly..and then swap premiums have to be higher not lower...

Hope my question is clear......

Jyothi

While evaulating portfolio credit risk (in the sense of all the credit models), the concept is that higher positive correlations leads to higher portfolio risk, and negative corrleations lower portfolio risk.

Now when you consider a basket CDS where the reference asset is a basket of debt securities, the logic is inverted. Higher correlations actually lower the swap premium and vice versa.

The question is: Swap premiums (for either the 1st to default or N to default) are based on the number of defaults taken individually or taken as group? If correlations are high, then if one

asset defaults (in a nth to default) the nth default will be reached quickly..and then swap premiums have to be higher not lower...

Hope my question is clear......

Jyothi

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