Creating CDO tranches

Credit guide: risk allocation

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Even though the motives behind the creation of each CDO differ widely, the principles underlying the structuring of a transaction remain similar. At the heart of these principles is the division or slicing of the credit risk of the reference portfolio into different classes, known as tranches. In accordance with its seniority, each tranche enjoys rights and priorities concerning payments generated by its collateral. Alternatively known as a waterfall structure, this is the process whereby in ban

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