1. Below there is a screenshot of a Monte Carlo simulation of a CDO. All loans in the underlying portfolio have an unconditional default probability of 1%, a loss given default of 50%, and a factor sensitivity of 0.3. If factor sensitivities were to increase to 1 (rather than the 0.3 in this example), and all the rest of the information were to remain unchanged, what would be the default probability and expected loss for each of the three tranches listed in the red rectangle. Notice that you do not need to conduct a simulation to answer this question.

AutoSave 11cdos - Compatibility Mode Search File Home Insert Draw Page Layout Formulas Data Review View Developer Help 137 D E B 1 Simulation specifications 2 3 trials 1,000,000 Simulation results for tranches Attachment PO EL 0% 59.33% 0.73% 0.01% 16.48% 0.13% 0.00% 7% 6 Run SimCDO U LGD 18 Portfolio 9 Loan 10 1 1.00% 11 2 1.00% 12 3 1.00% 13 4 1.00% 14 5 1.00% 15 6 1.00% 16 7 100% 17 8 1.00% 18 9 1.00% 19 10 1.00% 20 11 1.00% 21 12 1.00% 22 13 100% EAD 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% w 100 100 100 100 100 100 100 100 100 100 100 100 100 0.3 0.3 0.3 0.3 0.3 0.3 03 0.3 0.3 0.3 0.3 0.3 0.3 AutoSave 11cdos - Compatibility Mode Search File Home Insert Draw Page Layout Formulas Data Review View Developer Help 137 D E B 1 Simulation specifications 2 3 trials 1,000,000 Simulation results for tranches Attachment PO EL 0% 59.33% 0.73% 0.01% 16.48% 0.13% 0.00% 7% 6 Run SimCDO U LGD 18 Portfolio 9 Loan 10 1 1.00% 11 2 1.00% 12 3 1.00% 13 4 1.00% 14 5 1.00% 15 6 1.00% 16 7 100% 17 8 1.00% 18 9 1.00% 19 10 1.00% 20 11 1.00% 21 12 1.00% 22 13 100% EAD 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% w 100 100 100 100 100 100 100 100 100 100 100 100 100 0.3 0.3 0.3 0.3 0.3 0.3 03 0.3 0.3 0.3 0.3 0.3 0.3