TY - JOUR T1 - Synthetic CDOs JF - The Journal of Structured Finance SP - 10 LP - 16 DO - 10.3905/jsf.12.4.10 VL - 12 IS - 4 AU - Marc A. Horwitz Y1 - 2007/01/31 UR - https://pm-research.com/content/12/4/10.abstract N2 - The markets for both the credit default swap (“CDS”) and CDS positions held in a collateralized debt obligation (a “CDO”; such CDS positions comprising a “synthetic CDO”) have grown significantly in recent years. A primary driver of the exponential growth in the synthetic CDO market is investor perception that a synthetic interest in a particular asset is economically equivalent to direct ownership of the asset, but with the added ability to leverage or de-leverage the outstanding principal amount of the asset. However, taking a synthetic interest in an asset involves an additional layer of credit and legal risk. This article describes some of the additional risks of synthetic CDOs. The standardization of CDS documentation used in synthetic CDOs has contributed in large part to the tremendous growth in synthetic CDOs. Standardization promotes liquidity, eases the documentation process and reduces time to market. However, it is important for investors to understand the differences between cash and synthetic CDOs and to evaluate whether the risks attendant to those differences are appropriately rewarded in a synthetic CDO when compared to a cash CDO.TOPICS: Credit default swaps, credit risk management, information providers/credit ratings ER -