Collateralized Synthetic Obligation Restructuring

Abstract

In this article, the authors discuss an optimization-based methodology for restructuring collateralized synthetic obligations (CSOs). The restructuring methodology consists of the following components: 1) credit quality arbitrage using a risk-based optimizer and 2) a CSO pricer. The risk-based optimizer involves the use of nonlinear optimization techniques to obtain an optimal portfolio subject to constraints imposed by the investor; and as the name suggests, the CSO pricer calculates the price of the CSO in question. Sample results using a hypothetical portfolio structure are presented.

TOPICS: Fixed income and structured finance, credit risk management