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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A $1,000 million CDO pool has an attachment point of 5% and a detachment point of 15% for the mezzanine tranche. Pool losses are 12%. A second scenario has pool losses of 20%. What are the percentage losses to the mezzanine tranche in the two scenarios, respectively?

The mezzanine tranche loses 70% in the first scenario and 100% in the second. Its width is 10% of the pool; a 12% pool loss exceeds the 5% attachment by 7 points, which is 70% of the width, and a 20% loss exceeds the 15% detachment point.

  1. A70% and 100%Correct
  2. B12% and 20%
  3. C60% and 100%
  4. D70% and 50%

Explanation

Tranche width is 15% - 5% = 10% of the pool. At 12% pool loss, the tranche absorbs 12% - 5% = 7%, so 7/10 = 70%. At 20%, losses exceed the detachment point, so the tranche is wiped out: 100%. Using 60% would come from taking (12-6)/10, a misplaced attachment.

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