Which of the following statements regarding CDO-squared is correct?

Which of the following statements regarding CDO-squared is correct?

I. CDO-squared use other CDOs and CMOs as collateral.

II. Risk assessment of CDO-squared is almost impossible due to their complexity.

III. CDO-squared have lower credit risk than CMOs but higher than CDOs.
A . I only
B . I and II
C . II and III
D . I, II, and III

View Answer

Answer: B

Explanation:

CDO-squared instruments use other CDOs and CMOs as collateral (Statement I). Due to their complexity, risk assessment of CDO-squared is almost impossible (Statement II). The statement that CDO-squared have lower credit risk than CMOs but higher than CDOs (Statement III) is incorrect; typically, CDO-squared instruments have higher risk due to the additional layer of complexity and leverage.