In the first of this pair of columns (Risk December 2007, pages 92-95), we focused on the valuation of tranches of collateralised debt obligations (CDOs) referenced to corporate credits. This time, we turn to valuing tranches of CDOs of asset-backed securities (ABSs), with particular focus on CDOs of subprime residential mortgage-backed securities (RMBSs).
CDOs of ABSs are more difficult to value than CDOs referenced to corporate credits. This is because:
- The assets in the CDO collateral pool