TY - JOUR T1 - Synthetic Arbitrage CDOS JF - The Journal of Structured Finance SP - 20 LP - 36 DO - 10.3905/jsf.2003.320308 VL - 9 IS - 2 AU - Ratul Roy AU - Glen M McDermott Y1 - 2003/07/31 UR - https://pm-research.com/content/9/2/20.abstract N2 - Synthetic arbitrage collateralized debt obligations (CDOs) use derivatives technology to transfer credit risk inherent in a pool of credits to capital markets investors, while at the same time exploiting spread mismatch between assets and liabilities within the transaction. Their emergence has been fueled by the explosive growth of the credit derivatives market and by their appealing features, which include short bullet maturities, brief asset accumulation periods, flexible structures, and spreads that are attractive relative to cash CDOs and corporate bonds. Despite these and many other attractions, the growth of this market has been hampered over the past few years by problems relating mainly to structure and to the quality of the underlying portfolio. Now, experience with this asset class has led to three areas of marked improvements that promise to reinvigorate this asset class: 1) portfolio asset selection methods have become more transparent and sophisticated and the ability to substitute reference credits has become more prevalent; 2) structures have evolved to balance the risks and rewards more fairly across the entire CDO capital structure; the borrowing of performance triggers from cash CDO structures has made mezzanine tranche return profiles more stable; and 3) credit default swap documentation has improved and has become standardized as it relates to the determination of a credit event and the valuation of the reference obligation post-default. ER -