There are many investment considerations in connection with CDO investments in general, and SCDOs are no different. Yet the emphasis may be different when looking at a synthetic transaction, and we suggest that the following considerations be included in an investor's due-diligence process in addition to their typical CDO due-diligence process:
- Reference portfolio: Quality and correlation are key
- Portfolio management: Static, lightly, or fully
- Credit event definitions: Capturing the essence of default
- Loss calculation: Methods differ, but multiple bids are best
- Settlement procedures: Now or later
- Discrete defaults: Avoid continuous default assumptions
- Bifurcated risk: Considering the high-quality assets
Bakalar, Nichol, Arturo Cifuentes, and Jeffrey Prince. "Investor's Guide to Synthetic CDOs." In The Handbook of Fixed Income Securities, 7th Edition, 725-728. Ed. Frank J. Fabozzi. New York: McGraw-Hill, 2005.
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