2. Consider the following quote: It is only when portfolios are tranched that the relative value of default correlation becomes meaningful. So, for subordinate tranches, the risk and spreads decrease as correlation between defaults increases, while for senior tranches the risk and spreads increase as default correlation increases.

(a) Explain the first sentence carefully.

(b) Explain the second paragraph.

(c) Suppose you think that credit correlation would decrease in the near future. What type of trade would you put on?