The "Base" Correlation in a CDO Is

question 2

Multiple Choice

The "base" correlation in a CDO is

• A) The lowest correlation implied across all the tranches of the CDO.
• B) The correlation required to match the value of the collateral of the CDO.
• C) The average correlation of all implied tranche correlations.
• D) The correlation required to match total losses from the equity tranche to any particular loss tranche.

---

Definitions:

Risk of Loss

The possibility that an asset's value could decrease due to changes in the market or other factors, affecting the holder's financial position.

Insurable Interest

A requirement that a person must stand to suffer a direct financial loss from the damage, loss, or destruction of the property or life insured.

Goods-in-bailment

Refers to personal property that has been delivered into the hands of another for custody or performance of some service, without transfer of ownership.

Economic Interest

A vested interest in financial gains or losses, typically relating to investments, ownership, or participation in business ventures or market activities.