Risk of the complete portfolio, Financial Management

Assignment Help:

(a) Presume we have a portfolio of n names with some default correlation ρ. The risk of the complete portfolio moves according to the change in default correlation. Alternatively if the portfolio is trenched according to the order of their defaults then a variety of tranches behave differently as ρ changes. For instance a high ρ indicates subsequent defaults occurring together where as a low ρ makes occurrence of subsequent defaults more or less independent.

(b) As default correlation raises the area under the middle part of the default density function decreases and the mass on the two extreme tranches increase. Therefore area under the subordinate tranche increases which means that the probability that the subordinate tranche loses all its money decreases. Therefore the risk for this tranche decreases along with the spread.

Alternatively the cushion for the senior tranches decreases as default correlation increases. Therefore it is more likely that the protection seller for the senior tranches will concede some losses.

Therefore the risk and hence the spread for this tranche increases.

(c) With a diminish in default correlation one should long on protection on the subordinate tranches and short on protection on the senior tranches.


Related Discussions:- Risk of the complete portfolio

Yield to call, Yield to call is the yield that would be realized on a...

Yield to call is the yield that would be realized on a callable bond assuming the issuer of the bond redeems it before maturity. A bond's call provision is detail

Collection of amounts due - account receivable management, Preferably all c...

Preferably all customers will settle within the agreed terms of trade. If this doesn't happen a company needs to have in place agreed procedures for dealing with overdue accounts.

What do disclaimer of opinion, Disclaimer of Opinion - Statement by an AUDI...

Disclaimer of Opinion - Statement by an AUDITOR indicating inability to express an opinion on the fairness of FINANCIAL STATEMENTS provided and reason for the inability. The audito

Stable money measurement, Stable Money Measurement A business entity e...

Stable Money Measurement A business entity enters within numerous transactions in which affect the business in varied ways.  Therefore recording, classification and summarizat

Securities analysis, 7. Bill Peters is the investment officer of a $60 mill...

7. Bill Peters is the investment officer of a $60 million pension fund. He has become concerned about the big price swings that have occurred lately in the fund’s fixed income sec

Financial reform, The recent financial reform in the Public Sector that had...

The recent financial reform in the Public Sector that had been implemented in Fiji is essential. Critically evaluate this statement.

Calculate total development cost, A developer has purchased a commercial of...

A developer has purchased a commercial office site in Melbourne and wishes to develop a building which will be sold to an institutional owner before completion of the building.

Trend analysis, Do you guys provide Trend Analysis assignment help? I need ...

Do you guys provide Trend Analysis assignment help? I need writing a report on Trend Analysis and it is about 2000 words. Let me know. I need to buy your solution.

Aligning financial reports, Aligning Financial Reports: The primary pur...

Aligning Financial Reports: The primary purposes of financial systems are to provide information to interested parties.  Any reports produced through the financial management p

Example to show the companys current gearing, Q. Example to show the compan...

Q. Example to show the companys current gearing? The company's current gearing 2000/ 8500 × 100 = 23.53% The current gearing position is on the low side particularly wh

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd