The correlation conundrum

Credit Defaults

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The idea of trading how closely the prices of different shares are correlated is well established. But in recent years there has been a push by banks and some hedge funds to create a similar market for credit based on the correlation between defaults.

The development has been made possible by the introduction of various structured credit products. One such product is the single-tranche collateralised debt obligation (CDO), where only one tranche of a CDO is created in the credit default swap (CDS

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