CDO and Subprime Mortgage Media Resources
The collapse of several hedge funds and the overseas ripple effect caused by writedowns on collateralized debt obligations (CDOs) and the failure of the subprime mortgage industry continues to be an issue to investors and business news journalists. CFA Institute has educational content available online and in person for journalists covering these issues. Articles on www.cfapubs.org may be accessed with a press token and complimentary press registrations are available to CFA Institute events.
Shareholders, management, and directors alike should enjoy the rewards of successful enterprise. Vigilance is important to ensuring that incentives are properly calibrated and aligned. Companies need to go further than managing the public relations challenges of executive compensation. Success in managing corporate risks must rank alongside corporate returns in determining rewards. The full lessons of the subprime crisis may still be ambiguous but perhaps the golden parachutes are for the first time drifting in the right direction.
The eerie thing about the U.S. subprime mortgage implosion is its familiarity. “It’s the same as with junk bonds and the savings & loans,” says Michael Lewitt, president of Hegemony Capital Management, a Florida-based hedge fund. “A financial product gets invented, the regulators don’t do anything about it, and the banks or whoever’s selling it push it until it breaks. In the meantime, it distorts some part of the economy — in this case, residential real estate.” Just how far those distortions will extend into the U.S. and global economy, only time will tell. But whatever its ultimate impact, the story of subprime’s rise and fall is a classic.
"Assessing Relative Value among CDO Tranches" by Jeffrey T. Prince, CFA
Investors in collateralized debt obligations (CDOs) grapple with several relative-value questions — relative value between two tranches in a given CDO, between two tranches in two different CDOs, and so on. Answers to these questions may not be as far off as originally thought. Investors can use a simple model to exploit data generated during the rating agencies’ evaluation processes to quantify the value of one tranche over another.
"CDOs and Correlation: A Few Modeling Misconceptions" by Arturo Cifuentes
The three drivers in modeling CDOs (collateralized debt obligations) are the probability of default, the recovery rate, and correlation of the underlying pool of credits. In general, the probability of default is by far the most relevant factor and correlation, the least. Unfortunately, an unwarranted amount of attention is currently given to correlation. Worse yet, most models are driven by (or based on) asset correlation assumptions when what is really relevant is the default correlation. There is no assurance that controlling the asset correlation can produce the desired default correlation.
"The Evolving CDO Market" by Douglas Lucas
The collateralized debt obligation (CDO) market has developed markedly
in sophistication and complexity since the emergence of the first CDO in
1987. Because of this complexity, a way to categorize, and hence to
understand, various CDO structures is needed. Equally important are
understanding the benefits of attaining leverage in a portfolio via the
CDO structure and CDO equity as well as the analysis of default
correlation in credit portfolios.
"Using Credit Derivatives to Enhance Return and Manage Risk" by George Spentzos, CFA
The credit derivatives market is growing rapidly in size as well as importance. Credit default swaps, the building blocks in the market, have several advantages over corporate bonds and asset swaps — not least of which is the ability to disaggregate the interest rate component from the credit component. The predominant strategies that hedge funds and other managers use to optimize credit portfolios are basis trades, curve trades, index trades, options trades, capital structure trades, and correlation trades.
"Credit Risk" by Jeremy Graveline and Michael Kokalari
The global market for credit derivatives has exploded in recent years; the International Swaps and Derivatives Association released a midyear 2006 report giving $26 trillion as the notional amount of credit derivatives outstanding. In conjunction with the development of credit derivatives markets, research on credit risk has also increased.
Fixed-Income Management 2007 Conference: Innovation as a Source of Alpha
This year’s event gathers practitioners and researchers who will explore improved approaches to security selection and portfolio management, share strategies to take advantage of new fixed-income instruments, and discuss best practices in risk management.