Question: 1. Consider the iTraxx CPPI example in this chapter. We assumed an increase in the value of the iTraxx tranche as qt1 dropped from 20%

1. Consider the iTraxx CPPI example in this chapter. We assumed an increase in the value of the iTraxx tranche as qt1 dropped from 20% to 15%. Now assume that spreads widen and credit quality decreases so that qt1 increases from 20% to 25%. Calculate the resulting change in the leverage and explain the adjustment in detail required to return to the target leverage of 2.

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