What is a synthetic Cdo?

Synthetic collateralized debt obligation (CDO) is a multilayer derivative product designed essentially for the purposes of credit risks transfer. It allows a diversified group of investors to obtain an exposure to a group of debt instruments to earn a profit. The derivative means that it is derived from reference/basic assets, and in this case they are different debt tools. In the CDO synthetic transaction, reference assets are not transferred to investors. This means that they take all the risks associated with the product without the ownership of basic assets. If the fund is composed of bond tools, CDO is called the obligation of collateralized bond (CBO). The CDO is also marked as an ensured loan obligation (duty) if the cash fund consists of banking loans. The CDO derivative is sold to investors as well as any other debt security.

CDO is further processed to create a synthetic CDO that is supportedVěro's derivative such as credit default swap (CDS). Usually the CDS is created to function as a fuse. For example, the bank issues a mixture of mortgages, bonds and other debts to many individuals and/or institutions. The bank then buys the CD from the investor as protection to face any credit events concerning these debts, which include failure, rejection, restructuring and more. The Bank will make a periodic payment or a one -time premium payment, as set between it and the sellers of CDS or investors, and in the case of credit action investors should compensate for loss.

Synthetic Cdo can be adapted to satisfy the diverse group of a different risk taste. This explains several levels of risk and return that are present in the structure of synthetic CDO. The return is adequate to the anticipated risk; This means that the low risk is equal to the low return and the high risk is likely to cause a high return. Plus, because these levels are relatively UPRavens okay, from safe to risky will be investors who risk less risk pay from those who take a greater risk. In addition, the proceeds from the sale of CDO securities can be exceeded to other less risky securities.

those who manage and/or sell CDOs are called sponsors. Due to the special motivation of the sponsor, the synthetic CDO will be carved into the balance of the Cdo or the arbitration of the CDO. In the earlier case, sponsors try to remove assets from their balance sheet. Banks also use this method to significantly reduce capital requirements imposed by regulation. The CDO arbitration is to deduce the CDO management and/or the collection of profits from the difference between the cost of financing the underlying assets and any other return that it will achieve.

Synthetic CDO will usually be an intermediary between one or more protection sellers and one or more protection buyers, which will lead to an even more complex structure. Investors are basically sellers ofBurrows are buyers on the opposite side of the transaction. Investors receive premiums from buyers and pay for the loss to create a buyer in the case of a credit event.

There is also an intermediate synthetic product CDO called CDO with one trance, also known as CDO. This transaction is by its very nature very private and highly adapted to correspond to the investor's preference. In addition, there is a scale called weighted average evaluation (Warf), which is used to measure the quality of basic assets in the CDO market.