Figure 4 shows the sensitivity of the value of ABX 06-2 to further increases in expected losses. If losses were to rise to 5%, even with a somewhat lower correlation of 10%, the value of the BBB- bonds could fall by approximately 5 points. To achieve the same drop in price with a 2% correlation, the expected losses would need to rise to about 5.75%. This would imply a probability of exceeding 7% losses of about 35%.

Figure 4


Caveats: There are many assumptions that go into this analysis, so this analysis may not be producing exact results. Various assumptions include prepayment rates, timing of loss curves and the relationship between prepayments and defaults. The analysis also combines all 20 deals and applies a single distribution to all deals and treats CDS as though they were equivalent to the reference bonds.