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The Journal of Structured Finance

The Journal of Structured Finance

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Primary Article

CDO2, Correlation, Overlap, and Subordination

Implication for Pricing and Risk Management

Benoit Metayer
The Journal of Structured Finance Winter 2006, 11 (4) 59-70; DOI: https://doi.org/10.3905/jsf.2006.614083
Benoit Metayer
An Associate with Standard and Poor's in London. benoitmetayer@yahoo.com
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Abstract

In this article, the author prices and assesses the risk of CDO2 and, more precisely, he highlights the complex relationships among the dependence structure of the underlying assets packaged in the inner CDOs, the level of subordination of the single-tranche CDOs, and the performance of the single-tranche CDO2 (ST CDO2) itself. The article also investigates the crucial role of the correlation parameter and provides several numerical examples to point out the complex impact of this parameter on the risk profile and the valuation of ST CDO2. Investors looking for trade ideas involving long or short positions in correlation should be interested in the results.

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The Journal of Structured Finance
Vol. 11, Issue 4
Winter 2006
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CDO2, Correlation, Overlap, and Subordination
Benoit Metayer
The Journal of Structured Finance Jan 2006, 11 (4) 59-70; DOI: 10.3905/jsf.2006.614083

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CDO2, Correlation, Overlap, and Subordination
Benoit Metayer
The Journal of Structured Finance Jan 2006, 11 (4) 59-70; DOI: 10.3905/jsf.2006.614083
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