Several challenges, notably on the inflation front, and those arising from the erosion of our trade preferences and growing global competitiveness, will provide a severe test for the resiliency of our economy, and of our financial sector in particular, and indeed of our society and country as well.
The value of credit index tranches and CDO tranches is sensitive not only to the number of defaults among a set of issuers but also to the correlation of defaults. The more senior tranches suffer losses only in a scenario with many correlated defaults. The value of these senior tranches falls when default correlation rises.