Financial Risk Manager Part 2
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A financial company has provided protection against defaults for the senior tranche of a Collateralized Debt Obligation (CDO). Originally, the correlation of defaults among the underlying assets in the CDO was higher and used to price the different tranches of the CDO. Now, if the correlation of defaults among these assets significantly decreases while all other parameters remain unchanged, how will this change impact the financial firm's position?
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.