Question: Now consider a mezZanine CDO as described in the case that is based on a pool of BBB-tranches from a list of layer of securitization.

  1. Now consider a mezZanine CDO as described in the case that is based on a pool of BBB-tranches from a list of layer of securitization. Suppose further that the pool includes and extremely large number of BBB-tranches with mutually uncorrelated payoffs. What is the riskiness of a super-senior tranche of a mezzanine CDO in this situation? Suppose instead that the BBB-tranches have perfectly correlate payoffs What is the riskiness of super-senior tranches in this situation? In this latter situation, can you plot the payoff of the super-senior tranche as a function of the value of the assets in the mortgage pool underlying the first layer of securitization?

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