cdo strategy A &B

chesscorner · May 13th, 2005, 2:17 pm

if I give you two different strategies :A/ there's a CDO out there, 200 names. 1billion total notional. you buy protection on equity tranche for$40m. B/ there are two CDOs, 100 name each. names are not overlapping and these are the same 200 names as in A/you buy protection on equity tranche for$20m in each of them.would you rather do A or B, and why ?

Pat · May 13th, 2005, 5:37 pm

B ... because you are no worse off if the losses are split evenly between the two structures, and are better off if they occur disproportionately in one of the two baskets

chesscorner · May 17th, 2005, 12:02 pm

ok, i am quite new to this so let me ask candidly :lets say 3 issuers default in first basket in B/ and 1 in the other basket in B/since these 4 issuers exist in A/ won't i receive the same payout in A/ ( one payment) and B/ (two payments)?