Which of the Following Happens When the Default Correlation of the Companies

question 20

Multiple Choice

Which of the following happens when the default correlation of the companies underlying a CDO increases?

• A) The value of the senior tranche and the equity tranche to the protection buyer both increase
• B) The value of the senior tranche and the equity tranche to the protection buyer both decrease
• C) The value of the senior tranche to the protection buyer decreases and the value of the equity tranche to the protection buyer increases
• D) The value of the senior tranche to the protection buyer increases and the value of the equity tranche to the protection buyer decreases

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Definitions:

Acceptance

The action or process of being received as adequate or suitable, typically to be included in a group or to recognize the reality of a situation without attempting to change it.

Stigmatized

Describes individuals, groups, or conditions that are negatively stereotyped, leading to prejudice and discrimination against them.

Deterrence Hypothesis

The theory suggesting that the threat of punishment or negative consequences serves to prevent or reduce the likelihood of unwanted behaviors.

Positive Deviance

An unorthodox or unexpected behavior that deviates from the norm but results in a desirable outcome.