Synthetic CDO

A synthetic collateralised debt obligation is a derivative created from the securitization of a portfolio of credit default swaps. A synthetic CDO does not own actual fixed income assets such as bonds or loans. It gains exposure to the assets through the credit default swaps. Synthetic CDOs are usually divided into tranches based on the amount of credit risk assumed. Any losses in the CDO's portfolio affect the lowest rated tranches first and the highest rated last.

See also: Derivatives, http://www.federalreserve.gov/Pubs/feds/2004/200436/200436pap.pdf, http://www.math.ust.hk/faculty/maykwok/courses/FINA556/Fall_07/CDO_paper.pdf