Mastering Credit Derivatives: A step-by-step guide to credit derivatives and structured credit, Second Edition

Chapter 8. Cash CDOs

The emergence of a market for collaterized debt obligations (CDO) is a significant development for credit risk. The cash CDO^[1] market has now been in existence for more than 18 years, with considerably substantial issuance volumes since the mid-1990s, and is established as a mature asset class having withstood the peaks and troughs of a full credit cycle. CDOs have emerged as a major segment of the overall asset-backed securities market as well.

While the CDO market started as an efficient mechanism for managing credit risk on bank balance sheets and for obtaining regulatory capital relief, CDOs have evolved into complex instruments to achieve leveraged returns for investors with a wide range of credit risk appetites. Today’s ...