Hi, I will like to ask why in the first to default swap the premium decreases as correlation between issuers increases, given that second to default swap the premium increases as correlation between issuers increases. Also why the worse case for protection buyer and best case for protection seller is when there is max correlation between defaults. Thank you.

A nice graphical interpretation is the following (I have it from Schoenbucher's book): Consider a unit square with two circles, each circle standing for the probability of default of one obligor. Now you take a random draw from the square which contains all possible states of nature by throwing a dart on the square.-ftd: low correlation means a higher probability that any one of the two obligors is hit by your dart and thererfore defaults because the two circles add up in their surface.-second td: a payoff is only generated if both circles are hit, i.e. the overlapping region of the circles is important, i.e. the higher the correlation the higher the overlapping region.QuoteAlso why the worse case for protection buyer and best case for protection seller is when there is max correlation between defaultsConsider a portfolio of N credits which you want to protect. The circles are fully overlapping, i.e. if one of your credits defaults all will default, however, you get only one payment of the basket default swap so you'll make a loss.

Hi ecki,Very enlightening. Thank you.