Mezzanine tranche

In an ABS or CDO structure the issuer will usually issue different tranches of notes with different levels of seniority. As losses occur in the portfolio, the most junior investors will start losing their investment. The mezzanine investors will only face a loss on their investment after the junior tranche has been lost, that is, the losses on the portfolio are greater than the junior tranche. The senior tranche investors will only face a loss on their investments when the losses on the portfolio are greater than the sum of the junior tranche and the mezzanine tranche together. 

Sell protection in USD 2 million of iTraxx Mezzanine tranche at 54 bps... 

There is a positive carry on this trade because of our assumed CSOl value, which means invest in a greater notional of the Mezzanine tranche. This may not necessarily be the case, but the trade is unlikely to be put on if (irrespective of the CSOl value) it produces a negative value. 

On the liability side, the structure will have tranches whose allocations of income and loss are predefined. From most junior to most senior, the tranches include equity, mezzanine, senior, and super-senior. Equity, or first loss, is analogous to the equity in a company s balance sheet, and represents the residual interest remaining after other liabilities are paid off. The mezzanine, or middle tier of risk, typically represents low-rated tranches all the way up to AA risk. Senior usually refers to AA and AAA risk. Super-senior represents a level of risk that is deeply subordinated (usually by at least 10%) to AAA, and as its name implies is regarded as extremely safe. In a structure that is not uncommon, we will assume all of the liability tranches are unfunded except for the equity. ... 

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