Unformatted text preview: any capital is 0.002   very small! • The probability that the senior tranche is completely wiped out is 0.110 = 0.0000000001   extremely small! Perfectly dependent defaults • If defaults are perfectly dependent, the probability of k=4 or fewer defaults is the same as the probability of one default, 0.1. • The probability that the senior tranche is wiped out is 0.1   huge! Using historical data is problema:c • Not enough data to es:mate default correla:ons • E.g., in order to es:mate joint default probability for two companies’ bonds, need some joint defaults in historical data. Asset correla:on approach • Gupton, Finger, and Bha:a. “CreditMetrics   Technical Document”, Chapter 8, 1997. • Suppose the value of bond issuer’s assets determines its...
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 Spring '08
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 Default, Default judgment, Tranche, Financial terminology

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