ABSTRACT
A default basket is a portfolio of not too many obligors, e.g., not more than 10, although there is no ‘officially agreed hard limit’ regarding the number of obligors allowed in order to speak of a basket. At least it is clear that a basket contains more than one obligor or asset, respectively, such that in case of moderate or low correlation between the intruments in the basket diversification effects will reduce the overall portfolio or basket risk. In this chapter, we model default baskets and certain related products. This chapter also serves as a preparation for the slightly more complicated Chapter 3 on CDOs. As we will see later, default baskets and CDOs are ‘close relatives’.
