A method for designing CDO conformed to investment parameters

We propose a method for designing CDOs (Collateralized Debt Obligation) that meets investor needs regarding CDO attributes. It is demonstrated that adjusting the attributes (credit capability and issue amount) of CDOs to investors' preferences causes a capital loss risk that the agent takes. We formulate a CDO optimization problem by defining an objective function using the above risk and setting constraints that arise from investor needs and a risk premium that is paid for the agent. Our prototype experiment, in which fictitious underlying obligations and investor needs are given, verifies that CDOs can be designed without opportunity loss and dead stock loss, and that the capital loss is not more than a thousandth part of the amount of annual payment under guarantee for small and medium‐sized enterprises by a general credit guarantee institution. © 2007 Wiley Periodicals, Inc. Electr Eng Jpn, 161(4): 20– 28, 2007; Published online in Wiley InterScience ( www.interscience.wiley.com ). DOI 10.1002/eej.20581