afterworkguinness
Active Member
Hi,
I'm having trouble reconciling the effect of an increase in default correlation between the Meissner and Malz readings. To me they sound like they are saying the opposite of each other, so I must be missing something.
Meissner figure 1.7 shows for the equity tranche as default correlation in the underlying increases, the spread decreases.
Malz shows that the equity tranche likes correlation and ceteris paribus an increase in default correlation increases the value of the tranche.
EDIT:
Further reading is hinting to me that I am missing something about the meaning of spread here. Meissner says hedge funds shorted the equity tranche to collect the large spread. So then spread must not be the same as the value of the tranche, but the cost to invest in the equity tranche?
Thanks in advance.
I'm having trouble reconciling the effect of an increase in default correlation between the Meissner and Malz readings. To me they sound like they are saying the opposite of each other, so I must be missing something.
Meissner figure 1.7 shows for the equity tranche as default correlation in the underlying increases, the spread decreases.
Malz shows that the equity tranche likes correlation and ceteris paribus an increase in default correlation increases the value of the tranche.
EDIT:
Further reading is hinting to me that I am missing something about the meaning of spread here. Meissner says hedge funds shorted the equity tranche to collect the large spread. So then spread must not be the same as the value of the tranche, but the cost to invest in the equity tranche?
Thanks in advance.
Last edited: