Arbitrage Synthetic CDO
Arbitrage Synthetic CDO. Arbitrage synthetic CDO deals are motivated by regulatory or practical considerations that might make a bank want to retain ownership of debt while achieving capital relief through CDSs. In this case, the sponsoring bank has a portfolio of obligations, called the reference portfolio. It retains that portfolio, but offloads its credit risk by transacting CDSs with the CDO.
For arbitrage synthetic deals, two advantages are - an abbreviated ramp-up period (for managed deals), and - the possibility that selling protection through CDSs can be less expensive than directly buying the underlying bonds. This is often true at the lower end of the credit spectrum.
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