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Static vs.. Managed CDOs

Original CDOs were static

i.e. the underlying portfolio essentially unchanged for life of CDO

CDOs now largely managed

Manager can typically

Trade portfolio assets

Up to a predefined level

e.g. 5% per annum

Buy additional protection on deteriorating credits held

Sell swaps that have increased in value

Replace positions for higher spreads

Time liquidation of defaulted assets

To maximise recovery rates

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