The COSO Framework for Internal Control
February 12, 2025
Netting is a procedure that is commonly used by organizations all over the world to reduce their counterparty credit default risk. However, in order for the netting procedure to be carried out, companies should have contracts in place prior to the default event taking place. There is another procedure called close-out which is closely related […]
Leadership indeed becomes a challenging job, if managers do not understand their employees well. You can’t make employees work by scolding or being rude to them. Bosses are successful only when their employees look up to them and treat them as their role models. Let us go through some tips to overcome challenges in leadership: […]
In the previous article, we understood what reinsurance is. We also studied the various types of reinsurance contracts that are commonly signed by insurance companies. The problem is that many a times people get confused between reinsurance and double insurance, since there are more than one insurance companies involved in both the cases. However, it […]
An extensive review of the literature details would reveal that both practitioners and academics have explained transformational models with varied perspectives and focus on different points of views. Practitioner Models The Practitioner Models focus on senior management in an organization (Kanter, 1983 and Kotter, 1995). These models rely on opinions and also on illustrative anecdotes […]
Insurance is one of the most regulated industries in the world. Also, there are multiple players which offer every type of insurance. As a result, the competitive pressures are very high. This ensures that the insurance companies are not able to charge exorbitant premiums. Almost every insurance company across the world is a price taker […]
In the previous article, we studied about how collateralized debt obligations (CDOs) are derivative instruments that have been built on top of other derivative instruments. They are complicated to understand and risky to trade. However, despite the various negative accusations against collateralized debt obligations (CDOs), they continue to be very popular. This is because they have some distinct advantages. In this article, we will have a closer look at the advantages and disadvantages which can be attributed to collateralized debt obligations (CDOs).
At first glance, it might seem like the collateralized debt obligations might create very little value. This is because of the fact that they just take one form of asset and repackage it. The entire process seems unnecessary and it may appear like it is only meant to create transaction costs and management fees. However, there are several advantages to collateralized debt obligations (CDOs) which attract people towards this instrument. They have been mentioned below:
Collateralized debt obligations (CDOs) have several well-documented disadvantages as well. They have been listed below:
There is a complex credit protection structure that is commonly worded into these contracts. These complex structures have to be modeled in order to find out the probability of the lower tranches not being paid. This exercise is complex since it requires the use of empirical data and probability. This complication prevents the average retail investor from successfully investing and trading in CDOs
Collateralized debt obligations have their own advantages and disadvantages. This is the reason why investors have a love-hate relationship with this financial instrument. However, there is no denying the fact that this instrument is very risky and that conservative investors should simply avoid using it.
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