A $100 Million CDO Has Tranches Running from Loss Ranges

question 10

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.

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Definitions:

Growth and Development

The processes of physical maturation and psychological and emotional advancements through various stages of life.

Norm of Reciprocity

A social norm stating that people should repay, in kind, what another person has provided for them; the expectation that people will respond favorably to each other by returning benefits for benefits.

Perceptions of Trust

How trustworthiness is viewed by individuals, often influencing their willingness to be vulnerable or to cooperate with others.

Contrast Effect

A cognitive bias where the evaluation of something is influenced by comparisons with recently encountered contrasting objects or events.