1. Consider a BBB-tranche from a mortgage-backed securitization deal as depicted in Exhibit 4 of the case (see the stack with the label "MBS"). For simplicity, assume that is a zero-coupon security. Construct a plot that shows how the payoff of the holders to the BBB-tranche owners varies with the value of the assets in the mortgage pool at the time of maturity. Based on this analysis, determine how you can represent this payoff as a combination of payoffs of options and risk-free debt.

Exhibit 4 Role of AIG in Mortgage Securitization Exhibit 4 Role of AIG in Mortgage Securitization