Integrating credit derivatives and securitisation technology: the collateralised synthetic obligation
Moorad Choudhry
Introduction
Credit derivatives: the past, the present and the future
The determinants of credit spread returns
What’s driving the default swap basis?
What is the value of modified restructuring?
The debt and equity linkage and the valuation of credit derivatives
Nth to default swaps and notes: all about default correlation
Portfolio credit risk models
Credit derivatives as an efficient way of transitioning to optimal portfolios
Overview of the CDO market
Synthetic securitisation and structured portfolio credit derivatives
Integrating credit derivatives and securitisation technology: the collateralised synthetic obligation
Considerations for dynamic and static, cash and synthetic collateralised debt obligations
CDOs of CDOs: art eating itself?
Valuation and risk analysis of synthetic collateralised debt obligations: a copula function approach
Extreme events and multi-name credit derivatives
Reduced-form models: curve construction and the pricing of credit swaps, options and hybrids
Dynamite dynamics
Modelling and hedging of default risk
ISDA’s role in the credit derivatives marketplace
Credit linked notes
Using guarantees and credit derivatives to reduce credit risk capital requirements under the New Basel Capital Accord
This chapter is an analysis of the synthetic collateralised debt obligation (CDO), or collateralised synthetic obligation (CSO). We focus on the key drivers of this type of instrument, from an issuer and investor point of view, before assessing the mechanics of the structures themselves. The latter takes the form of a case study-type review of selected innovative transactions. Finally, we propose a new structure that combines the advantages of existing deal types to date, which presents features of interest for a wide group of investors and issuers alike. We begin with a brief introduction to the concept of the CDO, a progressive development of well-established securitisation techniques.
SECURITISATION AND THE CDO
A cashflow CDO is a structure represented by an issue of the notes with interest and principal payments linked to the performance of the underlying assets of the vehicle. These underlying assets act as the collateral for the issued notes, hence the name. There are many similarities between CDOs and the asset-backed securities (ABS) that pre-dated them. The key difference between CDOs and other ABS and multi-asset repackaged securities is that the collateral pool is
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