On Rating Cash Flow CDO's using the BET Technique

by João Garcia of Dexia Group,
Tom Dewyspelaere of Dexia Group,
Ronny Langendries of Dexia Group,
Luc Leonard of Dexia Group, and
Tony Van Gestel of Dexia Group

October 8, 2004

Abstract: This paper begins with a short explanation of what collateralized debt instruments (CDO's) are and how investors might use them. We give detailed descriptions of the waterfall and the binomial expansion technique (BET) first proposed by developed by Moody's. We then test how the model parameters affect the rating of the different tranches of a real contract (a cash flow CDO).

JEL Classification: G19, C19.

Keywords: Collateralised Debt Obligation, BET, Cash flow CDO, Rating Structured deals.

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