Skip to content

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

A bank retains a mezzanine tranche with attachment point A = 4% and detachment point D = 12% of a pool whose capital charge if held directly would be K = 8% of pool exposure. Using the logic of the Basel SEC-SA approach, which statement about the position is correct?

Because K of 8% lies between the attachment point of 4% and the detachment point of 12%, the tranche straddles K. The slice from 4% to 8% receives a 1,250% risk weight, and the slice above K receives a lower weight from the formula, subject to the 15% floor.

  1. AThe whole tranche is below K, so it receives a 1,250% risk weight
  2. BThe tranche lies entirely above K so it is subject only to the 15% floor
  3. CPart of the tranche (4% to 8%) is below K and receives a 1,250% risk weight, while the portion above K receives a lower weightCorrect
  4. DThe tranche is exempt because its thickness is 8%

Explanation

K = 8% lies between A = 4% and D = 12%, so the tranche straddles K. The portion from 4% to 8% (4 of the 8 points of thickness, half the tranche) is weighted at 1,250%, and the part from 8% to 12% receives a lower weight based on the formula, subject to the 15% floor.

Did you get it right without looking?

One question tells you little. A timed set on An Introduction to Securitisation shows your real accuracy, how long you take and where you lose marks.

Practise An Introduction to SecuritisationFree diagnostic mock

More An Introduction to Securitisation questions