Which of the Following Is True as the Correlation Between

question 20

Multiple Choice

Which of the following is true as the correlation between mortgage defaults increases?

• A) Equity tranches are almost certain to incur losses
• B) Senior tranches become more likely to incur losses
• C) The expected number of defaults increases
• D) Equity tranches are unaffected

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Definitions:

Strike Price

The predetermined price at which the holder of an option contract can buy (in case of a call option) or sell (in case of a put option) the underlying asset.

Expiration Date

The specific date on which an options or futures contract becomes void and the right to exercise it no longer exists.

American Call

An option contract that allows the holder to buy a specified quantity of an underlying asset at a set price before the contract expires.

Option Exercise

The act of utilizing the right, but not the obligation, to buy or sell an underlying security at a pre-determined price within a specified time frame.