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In Rememberance: World Trade Center (WTC)

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Collateralised Debt Obligations

by Domenico Picone of the City University Business School, London & the Royal Bank of Scotland

September 2002

Abstract: This chapter explores the market of CDOs and synthetic CDOs and their use in bank balance sheet management. We first review different types of CDOs used in capital markets and their economic rationals and then discuss the growth in synthetic CDOs under structural and balance sheet management perspectives. Following this we analyse the CDO equity piece and how it can be used in portfolio management, and then, we offer a structuring example: using with the Moody's Binomial Expansion and Double Binomial Expansion Techniques we arrive at the best debt structure for a synthetic CDO. We conclude with a short introduction on the S&P CDO evaluator.

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