Financial alchemy
The market for collateralised debt obligations based on equity barrier options has failed to ignite. But a new deal that offers investors access to AAA-rated tranches may shift the market dynamics. Christopher Jeffery reports
Credit Suisse First Boston (CSFB) closed a collateralised debt obligation (CDO) based on out-of-the-money barrier options last month that may reshape the market for CDOs based on relative-value opportunities between equity and credit. The reason: its financial engineers have converted equity into AAA-rated credit that will pay investors 66 basis points over Euribor at a time when other dealers had struggled to achieve A-rated tranches.
CSFB is not the first dealer to use deep out-of-the-money put
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