In Example 24.2, what is the tranche spread for the \(9 \%\) to \(12 \%\) tranche?

Data from Example 24.2

Consider the mezzanine tranche of iTraxx Europe (5-year maturity) when the copula correlation is 0.15 and the recovery rate is \(40 \%\). In this case, \(\alpha_{L}=0.03, \alpha_{H}=0.06\), \(n=125, n_{L}=6.25\), and \(n_{H}=12.5\). We suppose that the term structure of interest rates is flat at \(3.5 \%\), payments are made quarterly, and the CDS spread on the index is 50 basis points. A calculation similar to that in Section 24.2 shows that the constant hazard rate corresponding to the CDS spread is \(0.83 \%\) (with continuous compounding). An extract from the remaining calculations is shown in Table 24.7. A value of \(M=60\) is used in equation (24.12). The factor values, \(F_{k}\), and their weights, \(w_{k}\), are shown in first segment of the table. The expected tranche principals on payment dates conditional on the factor values are calculated from equations (24.5) to (24.8)

Transcribed Image Text:

F ~N(N-'[0(0) - Vor) Q(t | F) = N (24.5)