Abstract
The recent sub-prime debacle has brought âinnovativeâ structured credit products such as collateralized debt obligations under severe criticism. The complexity of some structured finance securities and difficulties in understanding their risks has been a common theme. This paper argues that CDO-squared structures can be so complex as to make risk assessment difficult. By modeling a simplified CDO-squared structure using Monte Carlo simulation, two of the risks unique to such structures are examined: default location risk and overlap risk. Failure to take account of these risks during a distressed credit environment will result in greater than anticipated losses among senior CDO-squared tranches.
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
