The Difference Between Implied Correlation and Base Correlation in CDOs

question 17

Multiple Choice

The difference between implied correlation and base correlation in CDOs is that

• A)Base correlation is the smallest correlation implied across all tranches of a CDO.
• B)Base correlation is the correlation of cumulative sets of tranches starting with the equity tranche,whereas implied correlation is for single tranches only.
• C)All base correlations are implied,but not all implied correlations are base correlations.
• D)Base correlation is historical and implied correlation is computed using tranche prices at a point in time.

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