This case is about FINANCIAL MARKETS, PRODUCT DEVELOPMENT, RISK MANAGEMENT
PUBLICATION DATE: February 29, 2004
Structured Credit Index Products and Default Correlation  Case Solution
During the year 2003, Morgan Stanley and JP Morgan revealed numerous credit products structured, which were expored to the correlations in the credit risk of other companies underlying the TRAC X index: tranched TRAC-X NA, tranched TRAC-X Europe, and options on both TRAC-X NA and TRAC-X Europe. The products of Tranch wereoften sold for higher prices. One of the issues being faced by Morgan Stanley’s Lewis O’ Donald was regarding the implementation of the “implied correlationâ€quotes on the tranched products. Taken at face value, the quotes obtainable in the market appeared to suggest that distinct tranches on the same underlying index of businesses were trading at different default correlations that were implied. The market prices varied of each product, as distinct default correlations for the same set of fundamental businesses–meaning that credit protection for the same set of fundamental businesses could be purchased or sold at prices that supposed that the defaults of the underlying companies were correlated differently from the perspective of different tranches. This correlation skew across the various TRAC-X tranches represented a type of pricing discrepancy.
Related Case Solutions:
Conflict on a Trading Floor (A), Portuguese Version
Case Analysis- Tetra Pak versus Greatview: The battle Beyond China
Bardhaman (B): Bengal Shrachi and the Township Design Decision
THESIS
Banco Esp rito Santo
Ricoh Company, Ltd.
Merging Esso Iceland and Bilanaust (A)
Dell vs Lenovo
AW Ltd.: Managing Change
Sustainability at Hewlett-Packard: From Theory to Practice