A slice of a securitisation with its own claim on the cash flows and its own loss priority. Junior tranches absorb losses first.
Where you will meet it
Tranche comes up in 30 learning outcome notes across the FRM syllabus.
A few of them:
Mortgages and Mortgage-Backed Securities FRM Part I · Financial markets and products
“A collateralized mortgage obligation divides the collateral into tranches.”
Credit Risk Transfer Mechanisms FRM Part I · Foundations of risk management
“Large sellers of protection, above all AIG Financial Products and the monoline insurers, wrote CDS on super-senior tranches of structured credit without holding enough capital or collateral.”
External and Internal Credit Ratings FRM Part I · Valuation and risk models
“Structured-finance tranches rated AAA before 2007 suffered large losses when house prices fell, because the ratings did not capture correlation and systematic risk.”
Credit Risk FRM Part II · Credit risk measurement and management
“The tail of the loss distribution, and so economic capital and the value of senior tranches, rises sharply with correlation, because many simultaneous defaults become more likely.”
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