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Published by: api-26172897 on May 17, 2010
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 TrancheProb. Mortgage DefaultProb Tranche DefaultsProb CDO Default100.050.030 TrancheProb. Mortgage DefaultProb Tranche DefaultsProb CDO Default100.060.080.25Percent Change in Risk20175.0845339.84Alex TabarrokBased on Pozen 2010, p.95-96100 mortgages pay $1 or $0 with probability say 0.05. A tranche is a pool of mortCall a security that defaults only if 10 or more of the mortgates within it defaults aWe calculate the probability that the tranche defaults using the cumulative versioA CDO is a pool of x-tranche securities. In this case, start with 100, 10-tranche secall it a 10-CDO which defaults only if 10 or more of the 10-tranche securities defaFor the CDO of 100, 10-tranche securities we take the probability of default from tand TheEconomics of StructuredFinance Joshua D.Coval Jakub JurekErik Stafford

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