A $100 Million CDO Has Tranches Running from Loss Ranges

question 13

Multiple Choice

A $100 million CDO has tranches running from loss ranges of: 0-3%,3-7%,7-10%,10-15%,and greater than 15%.The 7-10% tranche may be stated equivalently as

• A)A long call on the CDO collateral at strike $10 million and a short call on the CDO collateral at strike $7 million.
• B)A long put on the CDO collateral at strike $10 million and a short put on the CDO collateral at strike $7 million.
• C)The value of the $3 million tranche plus a call spread consisting of a short call on losses at the 7% strike level and a long call at the 10% strike level.
• D)The value of the $3 million tranche minus a call spread consisting of a short call on losses at the 7% strike level and a long call at the 10% strike level.