The coverage limit that constitutes the pre-specified maximum level a protection buyer (in a credit-linked instrument/ arrangement such as a collateralized debt obligation, CDO, or a similar structured product) is paid as protection against losses. It represents the excess of credit losses on the reference portfolio.
A tranche’s size is the difference between the detachment point (U) and the attachment point (L) of a tranche. For example, if L is 3% and U is 7%, the tranche size is
Tranche size = detachment point – attachment point
Tranche size = 7% -3% = 4%
When an investor sells protection on the tranche, any realized losses on the tranche will be covered to the benefit of the protection buyer. In return, the protection seller is paid a premium, at regular intervals by the protection buyer, during the life of the transaction. The tranche size constitutes a prespecified limit to the excess amount of credit losses over a threshold.
Tranche size is also known as a tranche notional.
