Abstract

Synthetic collateralized debt obligations (CDOs) are structured financial products that closely mimic the risk and cash flow characteristics of traditional (cash-funded) CDOs. To explain synthetic CDOs, we first go over the general nature of the instruments they are designed to mimic, and thus we start this chapter with a brief overview of traditional CDOs. As we shall see, these are instruments that allow one to redistribute the credit risk in a given portfolio into tranches with different risk characteristics and, in the process, meet the risk appetites of different investors.

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