Demystifying the practice of synthetic CDO valuation

A collateralised debt obligation (CDO) involves creating a portfolio of fixed-income securities or credit derivatives and repackaging the underlying risk of the portfolio by partitioning it into tranches. The tranches are created to suit the risk-return profiles of a wide range of investors. In cash CDOs, the portfolio of underlying securities consists of cash instruments, that is, bonds, loans, asset-backed securities and so on; these constitute the asset side of the structure. The liabilit

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