We performed a comprehensive analysis on the price bounds of CDO tranche
options, and illustrated that the CDO tranche option prices can be effectively
bounded by the joint distribution of default time (JDDT) from a default time
copula. Systemic and idiosyncratic factors beyond the JDDT only contribute a
limited amount of pricing uncertainty. The price bounds of tranche option
derived from a default time copula are often very narrow, especially for the
senior part of the capital structure where there is the most market interests
for tranche options.