Assume that the CDX-iTraxx index has 125 names in it, for a total notional of $100,000,000. If the recovery rate on default of any name is 40%, at least how many names must default for the 3-7% tranche of the CDO to be wiped out?

Question

Quizplus · Accepted Answer

The 3-7% tranche of the CDO is worth $3,000,000. If the recovery rate on default of any name is 40%, then the total loss on default of a name is $60,000,000. Therefore, at least 15 names must default for the 3-7% tranche of the CDO to be wiped out.

Assume That the CDX-ITraxx Index Has 125 Names in It