Itraxx 0-100% Tranche

ak2000 · August 14th, 2006, 1:44 pm

Hi,Consider the spread on a 0-100% CDO tranche on the Itraxx indexConsider the weighted spread on the underlying portfolio of names with same weights as the indexThe 2 spreads are usually different as the fee (premium) legs do not match.Question:Is there an implied base correlation number also for the 0-100% tranche?(as opposed to a correlation skew for each tranche)tks

bigbird · August 15th, 2006, 1:24 am

If you have bought a 0-100% tranche haven't you just bought the index

ak2000 · August 15th, 2006, 6:33 am

Agree.I am comparing the 0-100% tranche (=index) vs. the underlying portfolio of names, as if you went out and sold protection on each single consituent name/bought each single bond.Does this make more sense now?

Lepperbe · August 15th, 2006, 7:49 am

this was recently discussed athttp://www.wilmott.com/messageview.cfm?catid=3&threadid=40853

bigbird · August 15th, 2006, 8:01 am

For the single name CDS vs the index see paper, see pages 11-23 with a summary on 23http://www.nuclearphynance.com/User%20Files/46 ... st.pdffrom this posthttp://www.wilmott.com/messageview.cfm?catid=4&threadid=27384

anuj76 · August 15th, 2006, 3:52 pm

To cut a long story short: no.There is no correlation risk on a CDO that is tranched at 0% - 100%. This is because the NPV of such a CDO is simply the sum of the NPVs of the underlying default swaps. Since everything in the portfolio is being protected in one shot, there is no correlation risk associated with a credit event in one tranche affecting the credit quality of issuers in other tranches. The reason for this is simply because there are no tranches.CDX = 0 - 100% CDO on same portfolio = sum of underlying default swaps

Lepperbe · August 15th, 2006, 4:14 pm

QuoteOriginally posted by: anuj76To cut a long story short: no.CDX = 0 - 100% CDO on same portfolio = sum of underlying default swapsThat's what I thought initially as well. However, it seems things are a bit more complicated than that.