A portion of a tranche that constitutes a non-standard CDO tranche (or other types of tranches) with smaller loss intervals in comparison with standardized tranches. Tranchelets are thinner slices forming narrower intervals such as 0-1%, 1-2%, etc. Tranchelets are designed to provide more granular leveraged credit exposure by slicing tranches into smaller slices.
The objective of a tranchelet is to fine-tune investors’ positions as to the exposures held. A tranche consists of at least two tranchelets, where the risk in all the component tranchelets has to add up to the tranche’s risk.
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