Wednesday 30 July 2008

Merrill's CDO sale - Long a Put Spread ?

- Interestingly Merrill's partial financing of the purchase essentially constitutes a put underwritten by MER on its CDO exposure
- However, the short put represents only one leg of a complex three-part transaction which synthetically results in Merrill’s purchase of a protective put-spread for its CDO.

CDO sale = long ATM put
75% financing of purchase = short OTM put

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