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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