Tranche value on a yo-yo

Correlation trading

The structured credit market has undergone a fundamental shift since May. Until then, dealers' business had been concentrated in the mezzanine part of the capital structure. However, the dislocation in the correlation market in May exposed the danger of a lopsided market, with a rise in idiosyncratic risk on the back of downgrades of General Motors and Ford laying bare the fragility of commonplace hedging strategies in a market driven by supply-and-demand factors.

During the third quarter, ma

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