If You Expect Default Correlations to Increase in the Future,what

question 6

Multiple Choice

If you expect default correlations to increase in the future,what trade might you engage in to profit from this view?

• A)Buy the senior tranche of a CDO.
• B)Buy a second-to-default basket option and sell a first-to-default basket.
• C)Sell a second-to-default basket option and buy a first-to-default basket.
• D)Short the equity tranche of a CDO.

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Definitions:

Adjusted Cost of Goods Sold

The cost of goods sold figure that has been adjusted for any changes in inventory levels, ensuring it reflects the cost of goods actually sold during the period.

Underapplied Manufacturing Overhead

An occurrence where the overhead expenses budgeted for manufacturing fall short of the overhead costs that were truly incurred.

Allocation

The process of assigning indirect costs to specific cost objects, such as products or departments.

Journal Entry

A record in accounting that logs a transaction and shows the affected accounts in debit and credit form.