FRM Part II · FRM Exam Part II · An Introduction to Securitisation
Which feature most clearly distinguishes a synthetic CDO from a cash CDO?
A synthetic CDO gains its credit exposure through credit default swaps on a reference portfolio, instead of holding the underlying assets as a cash CDO does. Risk is transferred and tranched without a physical sale of the assets.
- ACredit exposure is obtained through credit default swaps rather than by holding the underlying assetsCorrect
- BThe structure always has more tranches
- CIt is backed only by mortgage loans
- DIt has no equity tranche
Explanation
A synthetic CDO transfers credit risk through credit default swaps on a reference portfolio, so the issuer does not need to own or sell the assets. A cash CDO owns the assets. Tranche count, collateral type and presence of an equity tranche do not define the difference.
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