Spurred by enormous growth over the past couple of years, synthetic CDOs – securitizations driven by credit derivatives technology – now comprise the bulk of the collateralized debt obligations market. However, despite its success, the synthetic CDO market and the correlation books that “manage ” the risk are ripe for abuse imperiling both investors and bank arrangers. What are the major challenges facing these players? How do synthetic CDO deals work, and why is it so difficult to gauge the profitability of these transactions? Janet Tavakoli investigates. Note from Janet Tavakoli: I retain the copyright on this article which was published in Risk Professiona
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