Consider a [30%, 100%] super senior tranche , and a index CDS spread of 200 bps for 5 years maturity assuming 0% recovery and 0% interest rates. We’ll be pricing this tranche using one factor gaussian copula.
a) What is the tranche expected loss ?
b) What is the effect of correlation for equity tranche expected loss and par CDS spread? use 1%, 10%, 20%, 30% gaussian copula correlation and compute the par spread and expected loss. c) How do you hedge the super senior tranche with the index?