A Constant Proportion Debt Obligation (or CPDO) is a type of credit derivative sold to investors looking for long term exposure to credit risk on a highly rated note. They employ dynamic leveraging in a similar (but opposite) way to Credit CPPI trades.
CPDOs formed, first by creating a SPV which will issue some debt. The SPV will be backed by an investment in an index of debt securities (commonly credit default swap indices such as CDX and iTraxx. In theory this could be deal-specific, such as a bespoke index of sovereign debt) similar to a CDO. The investment index is periodically rolled, whereby the SPV must buy protection on the old index, and sell protection on the new index. In doing so, it incurs rollover risk, in that the leaving index may by priced much wider than the new index. The structure then allows for continual adjustment of leverage such that the asset and liability spreads stay matched. In general this involves increasing leverage as when losses are taken, similar to a doubling strategy, in which one doubles one's bet at each coin toss until a win occurs.
Read more about Constant Proportion Debt Obligation: Initial Reaction, Credit Crunch
Famous quotes containing the words constant, proportion, debt and/or obligation:
“For centuries the death penalty, often accompanied by barbarous refinements, has been trying to hold crime in check; yet crime persists. Why? Because the instincts that are warring in man are not, as the law claims, constant forces in a state of equilibrium.”
—Albert Camus (1913–1960)
“Fruits are acceptable gifts, because they are the flower of commodities, and admit of fantastic values being attached to them. If a man should send to me to come a hundred miles to visit him, and should set before me a basket of fine summer-fruit, I should think there was some proportion between the labor and the reward.”
—Ralph Waldo Emerson (1803–1882)
“I have been told, that in some public discourses of mine my reverence for the intellect has made me unjustly cold to the personal relations. But now I almost shrink at the remembrance of such disparaging words. For persons are love’s world, and the coldest philosopher cannot recount the debt of the young soul wandering here in nature to the power of love, without being tempted to unsay, as treasonable to nature, aught derogatory to the social instincts.”
—Ralph Waldo Emerson (1803–1882)
“So what if people say terrible things? Whatever they call me, I say, “Yes, and my name is Mary.” I refuse to be afraid. And I do this out of an obligation not to the community but to myself. Nobody should have a say in who I am.”
—Mary Hansen (b. c. 1975)