Financial Risk Manager Part 2
Get started today
Ultimate access to all questions.
Comments
Loading comments...
Ultimate access to all questions.
In the context of a financial firm that has sold default protection on the most senior tranche of a Collateralized Debt Obligation (CDO), what would be the impact on the firm's position if there is a substantial decrease in the default correlation between the underlying assets of the CDO, while keeping all other variables unchanged?
A
It will either increase or decrease, depending on the pricing model used and the market conditions.
B
It will gain significant value, since the probability of exercising the protection falls.
C
It will lose significant value, since the protection will gain value.
D
It will neither gain nor lose value, since only expected default losses matter and correlation does not affect expected default losses