Synthetic CDO

A synthetic collateralized debt obligation (CDO) is a financial product that allows investors to gain exposure to the credit risk of a set of underlying assets without directly owning them. Instead, it uses derivatives—contracts that derive their value from the performance of other assets—to mimic the returns and risks. Investors receive payments based on the likelihood of certain credit events (like defaults) among these assets. Synthetic CDOs are useful for managing risk and increasing investment options but can also be complex and carry significant risk if the underlying credit quality deteriorates.