A $100 Million CDO Has Tranches Running from Loss Ranges

A $100 million CDO has tranches running from loss ranges of: 0-3%, 3-7%, 7-10%, 10-15%, and greater than 15%. The 7-10% tranche may be stated equivalently as

A) A long call on the CDO collateral at strike $10 million and a short call on the CDO collateral at strike $7 million.
B) A long put on the CDO collateral at strike $10 million and a short put on the CDO collateral at strike $7 million.
C) The value of the $3 million tranche plus a call spread consisting of a short call on losses at the 7% strike level and a long call at the 10% strike level.
D) The value of the $3 million tranche minus a call spread consisting of a short call on losses at the 7% strike level and a long call at the 10% strike level.

Correct Answer:

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