Reference no: EM13569041

A standard synthetic CDO references a portfolio of 10 corporate names. Assume the following. The total reference notional is X, and the term is Yyears. The reference notional per individual reference credit name is X/10.The default correlations between the individual credit names are all equal to one. The single-name CDS spread for each individual name is 100 bp, for a term of Yyears. The assumed recovery rate on default for all individual reference credits is zero in all cases. The synthetic CDO comprises two tranches, a 50% junior tranche priced at a spread J, and a 50% senior tranche priced at spread S. All else constant, if the default correlations between the individual reference credit names are reduced from 1.0 to 0.7, what is the effect on the relationship between the junior tranche spread Jand the senior tranche spread S?

A. The relationship remains the same.

B. S increases relative to J.

C. Increases relative to S.

D. The effect cannot be determined given the data supplied.