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Quesrion about calculating losses in tranches: what am i doing wrong here? Because the right anwer is: - 3 3 . 3 % loss on
Quesrion about calculating losses in tranches: what am i doing wrong here? Because the right anwer is:
loss on mezzanine abs tranche
loss on equity abs cdo
loss on mezzanine abs cdo
loss on equity abs cdo
Below is my workings on how i solved it wrong:
Figure out the losses on underlying assets: in our case
Allocate loss to original senior tranche:
Senior:
Allocate losses to mezzanine tranche:
The mezzanine tranche has an allocation of however, since it is subordinate waterfall payment system it only absorbs losses after the senior tranche has absorbed its share. Calculation:
Break down the mezzanine tranche into CDO tranches:
The senior CDO tranche:
The mezzanine tranche:
The equity tranche: or
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