Structured credit’s fastest growing sectors, credit indices and synthetic CDOs, were the victims of a painful dislocation in May in the wake of the downgrades of General Motors and Ford [see this month’s cover story, The worm of doubt]. Correlation model price driven trades, which have been highly popular of late, went wrong for dealers and many players in the leveraged community.
“All credit tranche products (like CDOs) have option-like elements in them,” says Hyun Shin, professor of finance at London School of Economics (LSE).
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