If You Expect Default Correlations to Increase in the Future

question 8

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:

Surface Structure

In linguistics, the superficial appearance or syntax of a sentence, as opposed to the deeper, underlying meaning.

Flexibility

The quality of being adaptable or variable, referring to the ability to adjust to new conditions or the capacity of being bent or stretched.

Human Language

A complex system of communication unique to humans, allowing for the expression and understanding of thoughts, feelings, and concepts through spoken, written, or signed forms.

Common Chimpanzees

A species of great ape known for its intelligence and social behaviors, native to the forests and savannahs of Africa.