iTraxx tranche delta-adjusted basis meaning???

duin1 · November 8th, 2006, 7:04 am

I have seen some headlines recently stating that as Index has tightened equity and mezz have both tightened but on a delta-adjusted basis equity has tightened but mezz has widened. Would anyone pls be be able to explain to me the logic behind this process and what it means practically? Thanks

bigbird · November 8th, 2006, 8:14 am

CDX is roughly 3-7% is 80bps and delta of 5.2 7-10% is 18bps and delta of 1.4For a 1bps change in the underlying CDX index you would expect a change of 5.2 and 1.4 bps in each tranche respectively. I leave out equity of the example because it has upfront payment which complicates slightly. It is no surprise that if the index tightened both tranches tightened too, but the articles says that mezz has "widened on delta adjusted basis" meaning that it has not tightened as much as you would expected it too given the delta.

duin1 · November 8th, 2006, 10:59 am

hi thanks. Would u be able to expalin why mezz hasnt widened out so much? Also to confirm i understand if index widens from 25 to 26 then according to the numbers below we would expect 3-7% to widen 5.2 bps (leverage) and 7-10% to widen 1.4bps. In reality mezz doesnt widen as much as 1.4 bps - maybe only 1.1 bp instead which is why we say mezz has widened on delta-adj basisthanks

madmax · November 8th, 2006, 2:29 pm

Delta is only a first-order approximation. In the case of CDX tranches, it is computed for 1bp change in the underlying index, when you have larger changes delta is only an approximation of the effect