synthetic CDOs

A synthetic collateralized debt obligation (CDO) is a financial product that allows investors to gain exposure to the credit risk of a group of assets without actually owning them. Instead of holding actual loans or bonds, investors use credit derivatives called credit default swaps (CDS) to simulate the risk. These instruments are combined into a structured product, which sorts the risk into different levels called tranches. Depending on their position, investors can earn higher returns with higher risk or lower returns with more safety. Synthetic CDOs are complex, often used for risk management or speculative purposes in financial markets.