Valuing tranches of synthetic CDOs

In the second of this series of Class Notes articles, Charles Smithson and Neil Pearson consider the thorny issue of collateralised debt obligation (CDO) valuation. In the first of a two-part article (the second will be published in February 2008), they look at CDOs referenced to corporate credits


Different people want different values for different purposes. Someone purchasing a collateralised debt obligation (CDO) would want to know the 'scrap value' of the asset (that is, the value in a worst-case situation). Our belief is that the only choice is to use 'brute-force' scenario analysis (an approach we will cover in the February 2008 Class Notes article).

Other people will want to know the fair value for net asset value or financial statement purposes. While it is possible to obtain a

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