Mastering Credit Derivatives: A step-by-step guide to credit derivatives and structured credit, Second Edition

Chapter 10. Understanding tranche sensitivity

Having introduced the market standard correlation model in Chapter 7, we can now discuss how to calculate relative sensitivity measures based on this model, in the typical language of option ‘Greeks’ (see Table 10.1). The inclusion of tranches in portfolios has enabled investors to express credit views with very different risk and return profiles. For example, it is now possible to separate default risk from spread risk, and to take credit positions that become long when spreads are falling and short when spreads are rising. This precision, necessary for the implementation of such sophisticated strategies, emanates directly from the differences in sensitivities of tranches.

Table 10.1. Summary of Greeks ...