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Chapter 8 - Strategies on CDOs
8
Strategies on CDOs
A Collateralized Debt Obligation (CDO) is a diversified set of similar financial instruments where credit risk is allocated differently among the various tranches making up the CDO. It gives investors exposure to a customized slice (tranche) of the credit risk of a selected portfolio of reference credits.
Many different financial assets can be used to collateralize a CDO: asset-backed securities (ABS), corporate bonds, bank loans, emerging markets bonds, credit default swaps, etc.
The CDO market has reached a size of $583 billion (Figure 8.1), representing 15 % of the ABS market. According to some observers, the CDO market is still at its infancy and gives rise to many investment opportunities for the more experienced fund managers.
