Understanding collateralized debt obligations

Financial innovation in credit risk management and credit-linked investments have developed at a rapid pace over the past years, evolving into more sophisticated structures based on a pool of assets, such as collateralized debt obligations (CDO). Similarly, the exposure to such structures based on emerging market underlyings has become more substantial, exposing investors to a more complex risk. This paper provides a guide to better understanding the risk of such investments by illustrating a synthetic CDO based on a basket of emerging market sovereign issuers.