According to the topic "Structured Credit Risk", I've concluded:
About Value:
1. For a given correlation, increasing the probability of default will negatively impact the cash flows and the values of all tranches.
2. For a given probability of default, increasing correlation decreases the value of senior tranches as the pool is now more likely to suffer extreme losses. The equity tranche increases in value from increasing correlation as the possibility of zero credit losses increases from the high correlation.
About Credit VaR:
1. For a given correlation, increasing default probability generally decreases the VaR for the equity tranches and increases the VaR for the senior tranches.
2. For a given default probability, the senior VaR increases consistently with correlation. As the default correlation approaches one, the equity VaR increases steadily.
My questions are:
1. How can we interpret the result that while increasing the PD will negatively impact the values of all tranches, increasing PD have different impact on VaR for equity tranches and senior tranches?
2. Does it mean that increasing correlation will increases both Senior VaR and Equity VaR? Also, why the results are so different as it is to the value?
About Value:
1. For a given correlation, increasing the probability of default will negatively impact the cash flows and the values of all tranches.
2. For a given probability of default, increasing correlation decreases the value of senior tranches as the pool is now more likely to suffer extreme losses. The equity tranche increases in value from increasing correlation as the possibility of zero credit losses increases from the high correlation.
About Credit VaR:
1. For a given correlation, increasing default probability generally decreases the VaR for the equity tranches and increases the VaR for the senior tranches.
2. For a given default probability, the senior VaR increases consistently with correlation. As the default correlation approaches one, the equity VaR increases steadily.
My questions are:
1. How can we interpret the result that while increasing the PD will negatively impact the values of all tranches, increasing PD have different impact on VaR for equity tranches and senior tranches?
2. Does it mean that increasing correlation will increases both Senior VaR and Equity VaR? Also, why the results are so different as it is to the value?
