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Tutorial Questions - Week 8

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15 views

Tutorial Questions - Week 8

Uploaded by

londontower2001
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Tutorial Questions - The Credit Crisis of 2007–2008

Q1.

Assume that Merrill Lynch created the following ABSs and an ABS CDO from Subprime Mortgages
in 2006:

(a) Calculate the losses to tranches in different scenarios with detailed explanations and complete the
following table:

Losses to Losses to equity Losses to Mezz Losses to senior


Losses to Mezz
subprime tranche of ABS tranche of ABS tranche of ABS
tranche of ABS
portfolio CDO CDO CDO
10%
15%
20%
25%

(b) Investigate what happens as the width of the mezzanine tranche of the ABS in the figure is decreased.
Consider the situation where the tranche widths are 15%, 5%, and 80% for the equity, mezzanine, and
senior tranches. What is the effect on the table above?
Q2.

Suppose that mezzanine tranches of the ABS CDOs are resecuritized to form what is referred to as a
“CDO squared.” For these tranches created from mezzanine tranches of the ABS CDOs, 65% of the
principal is allocated to a AAA tranche, 25% to a BBB tranche, and 10% to the equity tranche. Assume
that every portfolio of assets that is used to create ABSs experiences the same loss rate.

(a) How high does the loss percentage have to be on the underlying assets for losses to be experienced
by a AAA-rated tranche of the ABS CDO?

(b) How high does the loss percentage have to be on the underlying assets for losses to be experienced
by a AAA-rated tranche of the ABS CDO squared?

(c) How high does the loss percentage have to be on the underlying assets for losses to be experienced
by a BBB-rated tranche of the ABS CDO squared?
Homework:

Q3.

Assume that Lehman Brothers Holdings Inc. created the following ABSs and an ABS CDO from
Subprime Mortgages in 2005:

(a) Calculate the losses to tranches in different scenarios with detailed explanations and complete the
following table:

Losses to Losses to equity Losses to Mezz Losses to senior


Losses to Mezz
subprime tranche of ABS tranche of ABS tranche of ABS
tranche of ABS
portfolio CDO CDO CDO
10%
15%
20%
25%

(b) Investigate what happens as the width of the mezzanine tranche of the ABS in the figure is decreased.
Consider the situation where the tranche widths are 14%, 2%, and 84% for the equity, mezzanine, and
senior tranches. What is the effect on the table above?
Q4.

Suppose that mezzanine tranches of the ABS CDOs are resecuritized to form what is referred to as a
“CDO squared.” For these tranches created from mezzanine tranches of the ABS CDOs, 75% of the
principal is allocated to a AAA tranche, 20% to a BBB tranche, and 5% to the equity tranche. Assume
that every portfolio of assets that is used to create ABSs experiences the same loss rate.

(a) How high does the loss percentage have to be on the underlying assets for losses to be experienced
by a AAA-rated tranche of the ABS CDO?

(b) How high does the loss percentage have to be on the underlying assets for losses to be experienced
by a AAA-rated tranche of the ABS CDO squared?

(c) How high does the loss percentage have to be on the underlying assets for losses to be experienced
by a BBB-rated tranche of the ABS CDO squared?

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