Cash flow arbitrage CDOs

The appropriateness of either model (cash-flow-based versus market value-based) will depend on the asset manager s trading style as well as the particulars of the asset class the asset s market liquidity, duration profile, and credit spread volatility. In terms of mechanics, cash flow arbitrage CDOs are no different than balance sheet CDOs, (again, the only difference being their intended pnrpose and asset sourcing strategy). Consequently, one should see the section on Balance Sheet CDOs for further details. Now, we shift the discussion to market value CDOs. 

As discussed, CDOs are generally categorised as either balance sheet CDOs or arbitrage CDOs depending on their intended purpose. In terms of operating mechanics, balance sheet CDOs are almost exclusively cash-flow-based while, arbitrage CDOs are structured either as cashflow-based or market-value-based. A later development, synthetic CDOs, now account for a growing number of transactions. 

Euro Zing I is a cash flow CDO that presents several features of novelty and interest. It is the first true arbitrage CDO of European asset-backed securities in that, 100% of the assets were sourced from the marketplace rather than an existing balance sheet. It is also the first CDO to use a unique, innovative dnal-currency liability structure in sterling and euro to access the sterling ABS market in a cost-efficient way as opposed to cnrrency swapping each asset individnally to a common cnrrency. 

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