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Question on Credit Risk Study Note

maoxindi

New Member
On Credit Risk Study note:
Page 19 (the number displayed at the right bottom corner)

35.6 According to Ashcraft, in a structured credit product (ABS), the equity tranches prefer higher correlation; i.e. ceteris paribus the equity tranch is less risky as the default correlation increases and more risky as default correlation decreases. Which of the following is true about the risk of the mezzanine tranche as default correlation increases?

In the practice question, what i don't understand is "the equity tranch is less risky as the default correlation increases and more risky as default correlation decreases". Could you explain why it is?
 

David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
Hi maoxindi, I moved this from FAQ to Credit Risk. If you post in the relevant topic (in this case, Credit Risk), often times, when you go to post your question, you may see your question has already been discussed.

Your question here, about equity/senior default correlation, is one of the most common already on this forum; e.g. http://www.bionicturtle.com/forum/threads/need-helps-on-q35-6-in-t6-notes.6779/#post-23102

... ideal is to append/build on a prior thread, which can be instructive to others (sometimes appends are amazingly instructive) rather than start afresh with a duplicate question which has been asked already many times. I hope that makes sense, thanks,
 
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