does this relation make sense? a synthetic CDO is to a cash CDO as an option is to an underlying. will that screw me up if i think of it like that?
Geez, I dunno. I’ve been telling myself that CDS’s are like puts on bonds for credit events. Does that simplification work?
No, because a CDS is not an option. It’s a derivative that is meant to mimic the performance of the underlying asset, not give you and option to buy or sell it.
sterling76 Wrote: ------------------------------------------------------- > Geez, I dunno. I’ve been telling myself that CDS’s > are like puts on bonds for credit events. Does > that simplification work? I would say this: You are SHORTING the bond and buying a treasury: The premium you pay is the diff b/w the coupon paid on the bond and coupon recieved on the treasury. If the Bond is in default you make money becaouse the prx decreases. This doesnt hold up all the way though. With a CDS if the bond is in default you get par which may not be the case with the analogy above as the price of the bond will mostl likley not go to zero if the recovery rate is positive.
excellent, thanks
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