The underlying pool. The underlying asset pool contains three identical assets. Each underlying asset makes a one-time payment of either $100 with...
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Please show all work.
Answer:
The underlying pool. The underlying asset pool contains three identical assets. Eachunderlying asset makes a one-time payment of either $100 with probability 0.5 or $0with probability 0.5 The asset payoffs are uncorrelated.Structured securities: Create three new bonds (or "tranches" ) that are prioritized claimson the cash flow from the asset pool.. The first bond - the "senior" CDO - pays $100 as long as at least one of theunderlying assets pays-off.. The second bond - the "mezzanine" CDO - pays $100 as long as at least two of theunderlying assets pays-off.. The third bond - the "junior" CDO - pays $100 only if all three of the underlyingassets pays-off.If none of the underlying assets pays off, then none of the CDOs do either.Answer the questions beginning on the following page.(a) (3 points) Create a table that shows all of the possible outcomes in the underlying assetpool and the resulting payoffs for the CDOs. Your table should have the followingheadings: "Asset 1", "Asset 2", "Asset 3", "Senior CDO", "Mezzanine CDO", "JuniorCDO". The header and first row of your table might look like this:Asset 1 Asset 2 Asset 3 Senior CDO |Mezzanine CDO Junior CDO$100$100$100$100$100$100(b) (2 points) What is the expected value of the payment from just one of the underlyingassets? (Hint: Compute the average of the possible payoffs from the asset.)(c) (2 points) What is the expected payoff from the "senior" CDO? (Hint: Compute theaverage of the possible payoffs from the asset.)(d) (2 points) What is the expected payoff from the "junior" CDO?
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