Suppose the real world PD for a certain loan type is 6% and the Loss...
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Suppose the real world PD for a certain loan type is 6% and the Loss Given Default is 50%. An ABS security has been formed using these loans. The structure has three tranches: senior, mezzanine and equity. You are told that the Ratings Agencies demand 15% subordination in order to support a AAA rating on the senior tranche.
What can you conclude about the portfolio correlation?
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