A Credit Derivative

In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the credit risk" or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender or debtholder.

 

The Relationship of Credit Derivatives to CDOs is shown below:

A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS).

 

Types of Collateralized Loan Obligations

 

A) Based on the underlying asset:

1. Collateralized loan obligations (CLOs): CDOs backed primarily by leveraged bank loans.

2. Collateralized bond obligations (CBOs): CDOs backed primarily by leveraged fixed income securities.

3. Collateralized synthetic obligations (CSOs): CDOs backed primarily by credit derivatives.

Structured finance CDOs (SFCDOs): CDOs backed primarily by structured products (such as asset-backed securities and mortgage-backed securities).[105]

 

B) Other types of CDOs by assets/collateral include:

1. Commercial Real Estate CDOs (CRE CDOs): backed primarily by commercial real estate assets

2. Collateralized bond obligations (CBOs): CDOs backed primarily by corporate bonds

3. Collateralized Insurance Obligations (CIOs): backed by insurance or, more usually, reinsurance contracts

4. CDO-Squared: CDOs backed primarily by the tranches issued by other CDOs.[105]

5. CDO^n: Generic term for CDO3 (CDO cubed) and higher, where the CDO is backed by other CDOs/CDO2/CDO3. These are particularly difficult vehicles to model because of the possible repetition of exposures in the underlying CDO.

 

Done