Final answer:
Higher default correlation makes senior tranches riskier while not significantly affecting the risk of equity tranches.
Step-by-step explanation:
An increase in default correlation in an Asset-Backed Security (ABS) structure can impact the risks of the tranches differently. The senior tranche becomes riskier because higher correlation means that when one asset defaults, others are more likely to default as well, challenging the tranche's protective buffer. In contrast, for the equity tranche, higher correlation does not significantly change its risk profile since it is already the first to absorb losses.
On the other hand, the equity tranche, being the most junior tranche, is already exposed to significant default risk. An increase in default correlation may not have as significant of an impact on the risks of the equity tranche since it is already highly risky.