A free lunch and the credit crunch

Jon Gregory
01 Aug 2008

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The structured credit market has grown rapidly in recent years and correlation is now traded across the capital structure, from risky equity tranches to senior tranches that are triple-A rated.1 Consider the most senior tranche of the CDX IG (North American Investment Grade Index), which references losses in the 30-100% range on the underlying portfolio of 125 investment-grade credits. An investor taking the risk on this tranche can potentially survive default of half the underlying portfolio

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