Constant Proportion Debt Obligation (CPDO) March 17, 2007Posted by riskopedia in Basel II, Economy, Of interest, Retail Risk, Risk Management.
This is a new product when introduced sometime around last year (2006). Here is a presentation by ABN AMRO, cpdo.pdf
Illustrate a simple example here (ref: http://www.structuredcreditinvestor.com/story.asp?PubID=250&ISS=22082&SID=15579):
• An investor purchased a US$100m 10-year note. The note principal is placed in high quality collateral. Let us assume it earns money market returns at LIBOR flat.
• The investor is selling protection on US$1,500m on the 10 year selected credit indices. Assuming the spread on the index is 35bp pa. The investors earns 525bp (35bp x 15).
• Investor receives LIBOR plus 200bp pa on the CPDO.
• Assume the arranger receives 60bp pa.
• The net position is 265bp (525 – (200 + 60)).
• The excess spread is set aside to cover certain costs:
1. Roll costs (as index is reset)
2. Mark-to-market costs.
Interestingly enough, with the sub-prime mortgage market news, will it have a flow on effect to CPDO investment structure due to unexpected change in economic environment?
Another article commented further http://www.ft.com/cms/s/1e48a64e-7363-11db-9bac-0000779e2340.html