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Basic Mechanics

On default of one of the Reference credits in the index

Protection buyer delivers securities

Face amount of 1/125 (i.e. 0.8%) of notional value of trade

To protection seller

Protection seller pays 0.8% of the notional trade

To protection buyer

Notional on the trade reduced by 0.8%

Tranches

Index traded whole

OR in standardised tranches

Designed to look like those of a CDO

Described in percentage of loss terms

»

e.g. 7%-10% tranche of NAIG covers losses on the NAIG index greater than 7% and up to 10%

Credit Indices

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