http://blogs.reuters.com/felix-salmon/2009/07/15/how-a-cdo-is-like-a-rectangular-bathtub/ A slice of lime in the soda Thu, 23 May 2013 23:51:59 +0000 hourly 1 http://wordpress.org/?v=3.4.2 http://blogs.reuters.com/felix-salmon/2009/07/15/how-a-cdo-is-like-a-rectangular-bathtub/comment-page-1/#comment-4248 Ginger Yellow Thu, 16 Jul 2009 11:02:00 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/how-a-cdo-is-like-a-rectangular-bathtub/#comment-4248 I suppose that analogy works well to explain the importance of correlation (although the brownian motion aspect renders it a tad unintuitive). But it really doesn't work to describe CDOs (or any securitisation) as a whole. In the analogy, it's perfectly possible (though unlikely) for the equity boat to make it through unscathed while the senior boat gets sunk. That can't happen in a CDO. I suppose that analogy works well to explain the importance of correlation (although the brownian motion aspect renders it a tad unintuitive). But it really doesn’t work to describe CDOs (or any securitisation) as a whole. In the analogy, it’s perfectly possible (though unlikely) for the equity boat to make it through unscathed while the senior boat gets sunk. That can’t happen in a CDO.

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