What Inherent Difficulty Was Solved with the Gaussian Copula Model

question 17

Multiple Choice

What inherent difficulty was solved with the Gaussian copula model and how did the model solve this problem?

• A)Pricing collateralized debt obligations (CDOs)and collateralized mortgage obligations (CMOs)involves prepayment and default risk; the model simplified these risks by attaching standardized default risks for various mortgage types.
• B)Pricing CDOs involves a great deal of prepayment risk; the model standardized prepayment risks for various types of CDOs.
• C)Pricing collateralized debt obligations (CDOs)and collateralized mortgage obligations (CMOs)involves prepayment risk, as well as default risk and interest rate risk; the model provided a simple way to measure correlation for these risks.
• D)Pricing CDOs and CMOs involves a great deal of default risk; the model more accurately calculated appropriate default risks.

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