Skip to content

FRM Part II · FRM Exam Part II · Credit Derivatives

A synthetic CDO references a portfolio of 100 names, total notional USD 1,000 million. A mezzanine tranche attaches at 4% and detaches at 10%. Cumulative portfolio losses reach USD 70 million. What is the loss allocated to the mezzanine tranche, and the tranche's remaining notional?

The mezzanine tranche is USD 60 million wide, attaching at USD 40 million. Portfolio losses of USD 70 million exceed attachment by USD 30 million, so the tranche loses USD 30 million and its remaining notional is USD 30 million.

  1. AUSD 30 million loss; remaining notional USD 30 millionCorrect
  2. BUSD 40 million loss; remaining notional USD 20 million
  3. CUSD 70 million loss; remaining notional USD 0
  4. DUSD 30 million loss; remaining notional USD 60 million

Explanation

Tranche size = (10%-4%) x 1,000 = USD 60 million, attaching at USD 40 million. Portfolio loss of 70 exceeds the attachment by 30, so the tranche loses 30 and has 60-30 = 30 remaining. Option B subtracts incorrectly by treating the attachment point as the loss; option D forgets to reduce notional by the loss.

Did you get it right without looking?

One question tells you little. A timed set on Credit Derivatives shows your real accuracy, how long you take and where you lose marks.

Practise Credit DerivativesFree diagnostic mock

More Credit Derivatives questions