A free lunch and the credit crunch

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 be

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