Thursday, Jul 19, 2007
How will the collapse of synthetic CDOs affect the CDS markets?
CreditMag: CDO guide: cashflow versus synthethic CDOs
The synthetic solution
The development of the credit default swap market has allowed originators to issue CDOs where the exposure to underlying credits is referenced via a CDS rather than directly to the funded asset.
Balance-sheet and arbitrage CDOs can be structured as cashflow or synthetic instruments, although an increasingly popular formula among originators is to combine the two into so-called hybrid CDOs. The cashflow CDO, which formed the bread and butter of the market in its formative years, is a structure in which CDO notes are collateralised by a portfolio of cash assets purchased by the originator. In other words, in this classical structure the CDO owns the physical bond, loan or other security referenced by the instrument.
Posted by lvmreader @ 09:28 PM (213 views) Add Comment
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