CDOs, PSEUDO DIVERSIFICATION and HOTDOGS
CDOs or Collateralized Debt Obligations were marketed as financially engineered diversified portfolios offering relatively high projected rates of return for a yield hungry buyers. These portfolios consisted of various slices or tranches of paper of multiple deals. This paper represented one party’s assets and another party’s liabilities. For example, mortgage notes, credit card receivables, subprime mortgages whether senior or junior are some key ingredients.Diversification principles indicate that by combining non-correlated assets one construct a less risky portfolio. Essentially, diversification acts to neutralize non-systemic or individual risks. There are offsets. Complementarily, appropriate hedging can treat systemic or market risks. What occurred is more in the order of “filling” portfolios with undesirable waste products. Under the guise of diversification, various engineers spiced the returns of the packaged product or portfolio to make them more palatable by listing
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OASIS® online contains many references for Derivatives. The following list highlights some of these references.
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