Securitization, ABSs, CDOs, and Credit Structured Products
In this chapter, we introduce securitization, asset-backed securities (ABSs), and collateralized debt obligations (CDOs). We discuss the economic rationale for securitization and highlight similarities between ABSs and CDOs. The role of CDOs in the GFC and recent regulatory developments affecting securitization are discussed. The valuation of CDO tranches and the link of CDO tranche prices to default correlation are explained. The concept of correlation trading is introduced in this chapter and elaborated upon in the next chapter. We discuss different credit indices such as ABX and LCDX as well as a range of credit structured products including credit options, constant maturity ...
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