CDS & CDO

CFA Level II
#1

If anyone feels up to it, feel free to use this thread to post a general overview on CDO’s and CDS’s as I’m having trouble wrapping my mind around some of the concepts. Personally, the tranche structure of the equity and mezzanine tranches confuses me as the material didn’t really explain which is subordinated to which and what the function of the equity tranche is. Also feel free to use this thread to post any incites you think might be usefull to know for the test, I appreciate the help.

#2
  1. CDOs and CDSs are pluralised abbreviations. Therefore one should not use an apostrophe. “CDO’s” means of or belonging to a CDO. “The CDO’s equity tranche is wiped out” for example. 2) “Mezzanine” has its (not the absence of an apostrophe) etymological roots in the italian word “Mezzo” - meaning “medium” or “half”. This is because it sits in the middle of the capital structure, between Senior tranches and equity. 3) In any structure, corporate or structured, equity is risk capital. So this always sits at the bottom of the capital structure (give or take warrants etc), to absorb first losses from the underlying - thereby protecting upper tranches. This also means that it carries the highest potential reward.
#3

Thanks Chris, the background regarding the Italian root of Mezzanine was impressive I might add.

#4

Can we assume the equity tranch in a CDO serves the same purpose as a support tranch in a CMO, which is to protect the senior/junior tranches (PAC for the CMO) against default (prepayment for CMO) risks?

#5

I strongly disagree with chrismaths’s point #1 as it makes Internet communication case-sensitive. This just can’t be. For example, “My company was wiped out by a boatload of CDOs” could easily be “Cuban defectors on ships”. Only by adding the otherwise grammatically bogus apostrophe do we make the meaning clear. Edit: Should that be “punctuationally bogus”? I dunno.

#6

I disagree with your disagreement, and as the only English speaker here, you must respect my authoritae. Edit: “I was watching the TV’s/TVs with a great deal of interest” TeleVisions or TransVestites? The apostrophe doesn’t help. Context helps.

#7

this is probably why there is no wikipage here.

#8

chrismaths Wrote: ------------------------------------------------------- > I disagree with your disagreement, and as the only > English speaker here, you must respect my > authoritae. > > Edit: “I was watching the TV’s/TVs with a great > deal of interest” > > TeleVisions or TransVestites? The apostrophe > doesn’t help. Context helps. I guess the problem is the phonetic alphabet. There’s just no way our Chinese friends would confuse the characters for transvestites and televisions. Did the English invent this messed up system?

#9

It’s called Latin script, so I’ll hazard a guess at no. The Egyptians had it right with hieroglyphics. At least you could just look at the pictures - that would have separated out TVs from TVs. What would be the symbol for a CDO? Answers on a EUR5 note to chrismath’s tower’s…

#10

chrismaths Wrote: ------------------------------------------------------- > It’s called Latin script, so I’ll hazard a guess > at no. > > The Egyptians had it right with hieroglyphics. At > least you could just look at the pictures - that > would have separated out TVs from TVs. > > What would be the symbol for a CDO? > > Answers on a EUR5 note to chrismath’s tower’s… A better question is, what would be the symbol for transvestite.