how to choose which financial qualifications to take?

I am experess my personal views, what i observe, not base on any facts so pls judge for yourself

CFP vs CFA?
Difficulty: The CFP is 1/3 the breath of CFA lvl one and half the difficulty. A lot of people told me CFP is way easier than what I said but I simply only look via the materials I have no really do CFP yet so I am not in a position to comment.

Who is it for:
CFP
Bank direct sales, non insitutional traders
Wealth manager who managed clients with investments less than 50k USD and port less than 500k usd
Non mangerial or Junior managerial position (Analyst and exectutive)

CFA
Portfolio, investment managers, high networth and insituational traders, asset manager
managed clients with investment more than 100k and more than 1M in port networth
middle and senior managerial position (Associate and above)
If you deal mainly insitutional base, like investment manager for a fund, financial controller, product controller, trust manager etc

recon: CFP seem reconize by a lot of bank clients, ie those individual that buy banking products. CFA is mostly reconize by insitutional investors, banks, FI and governments, most layman on the street do not know much about the CFA qualification. So if you deal with clients that are not insitutional it is very advantagous that you hold CFP.

CFA vs CAIA
one is for traditional investments the other is for alternative so no comparision here.
CAIA is about 50% easier than CFA.

CFA vs FRM and PRM
again the latters are for risk manager

CFA vs MBA
I do not have the stats but often it was the street knowledge that unless your MBA is from the top 35 schools in the world (not in order: Harvard, Yale, HEC, LBS, CEIBS, Stanford, Kellogs, Judge, IE, ...) it is unlikely that you would gain more recon and pay rise than holding CFA chartered. I assume the experiecne is the same and that the job are CFA qualified job.
Then again it differs from company to company. To be honest they both are different so it is very hard to compare them. If you can afford do both.

This blog would be discontinue tempory

I recently receive a pass in the CFA level 2 exams. The news was so wonderful I am still overfilled with joy one week after the release of the result.

Again I like to restate that this blog is not meant for the general public, it is meant for potential employers and other CFA/CAIA/FRM candiates. Please note I would only reply to potential employers, please email me using your company's email.

Since I am busy with work and studying both the CAIA and FRM exam I would have no time to update the blog. The blog would be discontinued until further notice.

Emails from employers (Banks and FI only) are welcome. No personal selling or telemarketing please. Ideally I am looking for CFA/FRM qualified job experience. You can reach me ngyaomin@ymail.com

I may be back in Dec after the FRM exams.

Sales Ethics 2

1. Do not gurantee performance, risk or returns
2. Do not dissuss more than one product in one meeting unless the product is a complemetn to the main product in discussion such as a short put to hedge a long stock position
3. All fees must be disclosed, this include what the fees are use for and 3rd party fees
4. An after tax performance report should be given
5. RM should consider tax when investing for the client
6. If advance technical models are use, RM do not need to explain in details but RM should use what if senerio, such as what happen if Interest rise to 5%, what happen if inflation drop to 1% etc, to give client a rough idea of the extreme values that can be expected. Extreme value must include down side value
7. RM should be constantly updated with related happenings
8. For investment of less than 25,000 RM should be at least a CFP.
9. For investment of 25k to 50k, RM should be at least pass CFA level one exam, CAIA level one, FRM level one, APRM or CHFC
10. For investment 50k to 100k, RM should be at least pass CFA level 2 exam, CAIA level 2 and be a certified FRM or PRM
11. For investment 100 to 250k, RM should at least pass CFA level 3 exam, be a CAIA chartered, or be a FRM charter holder
12. For investment 250k and above, RM must hold at least 2 of the qualification, CFA charter, FRM charter, CAIA charter, PRM
13. In event RM is unable to meet the qualification requirement, a qulified person must approve the sales and portfolio.

Now as an RM, you may ask how am i going to achive my sales target if i need to obey such tough rules? The ans is simple, those are not rules, those are basic ethics. If you have been acting unethically in the past it is time to change now.

The management can do their part by encouaring and rewarding for ethical behavior, and to reward for risk management. It is easy to reward for return because it is easily calculated but rewarding for risk is difficult because there are too many way of calculating risk, even risk adjusted performance have an entire universe of ways to calculate.

One way may be to increase base pay to reduce RM reliance on commission, but this is agued that their effort would reduce. But do recall it is sales pressure that lead to RM to resort to tatics that is unethical to many.

Even with the rules RM can get around with it. Yes. After words if you are unethical at heart no amount of law is going to prevent you from being unethical. Law serve as a guide, it is the heart of the RM that determines if clients get the best from him/her. Product and ethical training are important too.

Remember the world changes and laws must change, and investment products get more complex, the above laws is unlikely to cover even half of what is needed to protect the consumers, so it is not about the law, it is about the banks and thier staff. And you the client, yes do your homework, ask questions, think carefully, the money is yours not the RM

I am still writting on the final part of the financial crisis article. This final part include some facts that many may not think about or think about but just don't dare to say it. It would be out in a few days. Estimated before friday.

Sales ethics?

The current financial saga have lead consumers like me to think, is the front line staff at the bank or financial insituation well equip to serve our best interest?

Although this article would attempt to increase the rights and protection of the common consumer. Do keep in mind that it is the responsiblity of we the consumer to do some homework and it is in the mind of the bank to make profit, so keeping the balance between consumer power and power of the FI is not an easy task.

Below are some suggestions. Some of which may have been implemented by certain FI. Do bear with me if there are repeats. The seller shall be called RM. The rules are not arrange in any order.

1. The seller of the products bears full responsiblity for everything he said and for everything that is written on the prospectus.
2. Should there be a conflict between what was said and what was in the prospectus, what was said would dominate.
3. All fine prints must be explained to the client. This include their meaning, their impact on the investments, and other information deem important by the RM
4. All returns are to be stated in annualized terms and in local dollars.
5. If risk adjusted return is use, the risk that is use must be clearly stated. RM must explain the differences between the various risk that can be use. This is irregardless of whether the FI use them or not.
6. Bench mark for comparision must be clearly stated. This include the rationale, the period of comparison etc.
7. RM must truely understand the products they are selling. This include the risks. The risk must be explained to and fully understand by the client. RMs cannot reply on fine prints or the prospectus to explain risk.
8. RM would be held liable for everything that is deem material, and was not communicate with the client directly. By directly it mean face to face contact. Material information include information that may be beyond access by the RM. It is the RM responsiblity to make sure that all the material information are at their finger tips. Material is any information that may impact decisions about the investment, directly or indirectly, now or in the future.
9. Do not use returns as a mask for risk. A statement such as "although the risk is high but look you earn super high returns"
10. Do not use risk as a mask for returns. "This return is low, but afterall it is a risk free investment"
11. If an investment is capital protected. Explain how much of the captial is protected and under what circumstances it would now. Also tell who protect the capital and what methods or tools did they use to protect the capital.
12. Explain the investment methods and techniques. This include asset selection methods, asset allocation methds, how performance is measured and monitor, etc
13. Explain risk management. This include how risk is measured and managed. This also include what the manager would do in event of unexpected occurace such as serve counterparty loss, natural disaster, bankrupcy etc.
14. All direct risk must be explain to the client. Indirect risk must be mention, the client can however request a deeper explaination on indirect risk. Direct risk are credit risk, market risk, liqudity risk, foreign exchange risk, structure risk. Indirect risk are operation risk, counterparty risk, model risk, counter party risk, and other risk that is deem indirect. Any risk whether classified as indirect that directly impact decision making and directly affect investment value is to be classified as direct.
15. All risk must be mention, this is irregardless of whether they are known or not. If risk is uncertain, the uncertainties must be explain to the client. This also include methods in which the manger would managed the uncertainties.
16. The prospectus should be sent to the client at least 48 hours before the meeting
17. After the meeting the client would have 24 hours to look at the prospectus without interuption
18. During the 2nd meeting, RM must reconfirm that the client understand the products and the risk.
19. after signing the agreement the client would have 240 hours to cancel the investment at no cost.
20. What appears in the contract must be the same as what is in the prospectus. If there is conflit, the prospectus material would dominate
21. A though return and risk analysis must be done in order to determine the suitablity of the products for the client
22. A total portfolio concepts must be look at. The RM would be liable for loss that affects other investments in the portfolio even if that investment is not under the RM mandate and or the client did not disclose the investment. It is the RM to discover the total portfolio of the client. In events that the total portfolio of the client cannot be discovered, a proper documentation stating the steps the RM has take and the consequences of not having a total portfolio view must be clearly communicate to the client.
23. Investor past experience does not indicate his risk ability and torrelance
24. RM must stick to the investment process statement or what ever statement the bank calls it. No chances in methods or allocation can be made without written consent of the client.
25. The RM must disclose all direct and indirect compensation that is resulted in the sales of products. Such as commission and any direct or indrect compensation including performance bonus
26. RM must explain the role of his company in the product, this include being a market maker, a trust manager etc.
27. RM must explain any conflict of interests. This include RM owns the products, is about to own the product or owns the products previously.
28. RM must obey all rules laid by the authorities like MAS at all time. In event where there is conflict the stricter law would dominate. If unable to decide which law is stricter, the authories would be followed.
29. Clients goals, constraints, needs must be acess and respected.
30. If there is conflict between goals and risk, the client must be educated.
31. It is the responsiblity of the RM to inform the client that the product invested and the portfolio consructed would change in performance when market changes. Down market performance of the portfolio and product must be explain to the client.
32. Any material changes made to the investment, investment process, performance measurement, risk management must be communicate with client over the phone and voice logged. Any indirect material change can be mailed or email to the client.
33. The structure of the investment must be explain to the client. This include how the investment is structure and the flow of Cfs from one party to the other. For example all the traches, and party of a CDO structure investment must be explained. This include what would happen if one party default. If other tranches have priority claims to the cfs or if the tranches that client invested provide protection of any kind this is direct risk. If the tranches that client is investing is protected, who and which is giving protection and the consequences if the protector fail must be clearly communicated to the client. This again is direct risk
34. Client must be updated with product changes at least every 3 months by writting.
35. Client IPS must be updated and review every one year at mininium.
36. When investment matures, RM would no longer allow to reinvest at their will. Normally RM would roll over the investment in some fixed deposit account. For now unless the client agreed in both writting and speech, the mature investment would be credited to client current account. If client have no current account, the RM must inform the client to do other arrangements.
37. Do not use comparision as a tool for marketing the product. "Our fund out performe 10 funds in singapore in sharpe ratio". "look at how much you are losing out if you put your money in the fixed deposit that pays only 1.5%, while our investment reap you an average of 4%". The first statement can be made if the comparision is clearly define to the client including how the benchmark is selected and how the performance is being measured. The second statement or that of similar nature must not be made. This is simple because it make the client think that the product is superior without him understanding the risk that make the product superior.
38. Everything said and written must be base on facts. Statements like "due to my 20 years of experience this investment is a winner" must never be made
39. Reputation is no longer use as a risk management or mitiagation tool. statement such as "I personally gurantee this investment" or "My company is very well establish and financially sound" must not be made. You do not have to tell client your company is well establish the client would know that. If he is in doubt he would ask and you can expain to him.
40. Do not use agressive sales tatics. This include but is not limited to. Interupting the client in any means (including excessive coughing), when he is reading the prospectus, over emphasising on returns, talking too fast, talking too slow, rushing the client, staring at the client when he is reading. Statements like the following are agressive. "if you dont invest now the oppunity would slip." "you should invest as many people are investing in this product" "this offer is for limited time only." "if you dont invest you may not meet your financial goals" "look at this grandmother who did not buy a good investment and end up living on cardboards" "better buy the insurance now, or one day you may be face with the trouble of being rejected by an insurance company" "all my investment have made money for you in the pass, you should trust me on this one" and so on.

How to study for some of the toughest financial exams.

While waiting for me to finalise some of my ideas on the 3rd and perhaps last part of the financial crisis article, let us side track a bit and talk about how to prepare for financial exams like CFA, FRM exams. No doubt those exams are difficult and no matter what additional aids you can afford you cannot afford to cut your study time. For first time takers you would need at least 350 hours for FRM and CFA level 2 exams, the reason why the average is 250 hours is because most of the candidates are repeat students, when you repeat you need perhaps half of the 350 hours.

So how do you want to study to max your chances of passing. There is no perfect way but there is one thing i must stress, it is to start early. Starting early give you time to absorb the information and to seek help should you encounter a problem. It also allow you to plan for mishaps or unpredictable situation such as business travel and the birth of a cute baby. With many of the candidates holding important positions in the bank, starting earlier can allow for gaps.

Usually the first stage and perhaps the most difficult stage is call the understanding stage. At this stage you would read the material and try to understand as much things as you can. You would take notes, do further reseach, ask your collegue etc. This stage build the base and it is perhaps the most important stage and also the most lengthy.

The next stage comes pratice. Knowing the material but not knowing how to do questions is as good as not knowing the material. During this stage you may also gain deeper understanding. Some concepts can only be deeply understood if you do questions on them, especially the quantitative questions.

Then come the exam pratice stage, where you put your skills and pratice exams. This stage is crucial. It is during this stage where you plan your exam strategies such as how long to spend on each question, what type of question to do first, when to go to the toliet. Unless you are some kind of experience taker don't assume that the bridge would allign when the boat is in front of it. Do at least one paper on real exam condition and stress yourself, ask your child to run around and kick a ball to your desk, if you dont have a child you can call me if you live in singapore i have few infants availble lol.

The last stage is where you put the facts to memory. Remember this stage would be so much easier if most of the work is done in the first few stages. By now most of your doubts should be clear and you should have a strong understanding of the concepts and how to apply them. Depending on your abilities usually this take one to two weeks.

During the exam. Expect the unexpected. Know the procedure, if you do not know ask some one who has experience. If you know what is going to happen you be less stress. Have batteries with you. If you are usually BA II plus the plastic one, change your batteries b4 the exam, dont waste your time unscrewing your calculator during the exam.

Here is what i do. Stage one, do all the question in which i can do and do it fast. Stage 2, do all question that i can do but need time. Then go to the toliet. Stage 3, do the more difficult questions by method of eliminating choice and picking the most potential answer, you cannot be sure of the answer but after so much reading you should at least know which one have a higher chances. Last stage check question in which you have doubt.

How long do i neeed?
It depends on how many hours u can spend per day, and can you make full use of the hours you assign. For parents with young child, constant crying from baby is going to disrupt your study, do plan for that. I am not a parent but i know baby can cry non stop. Typically 5 to 6 month for CFA and FRM studies, and 3 months for CAIA studies. ARPM needs maybe one month. PRM need also one month per paper. I assume that you are working and studying at the same time.
Always remember to plan for gaps in your study timetable for the u never know what may happen cases.

Should i get 3rd party support

I do want to stress that i am using 3rd party support. I do not want to recommend any products because that up to you the reader. But i do strongly felt when i study for CFA exams that the questions CFAI provide are too little and too simple to reflect the actual exams. The books by CFAI are nicely written but extremely thick. If you are a full time student and patient enough you can read it. Other wise i suggest you get 3rd party material to speed your understanding and use the CFAI as further reference. It is better to understand a little then to read a lot and understand nothing.

Once you have some understanding using 3rd party notes you would find reading CFAI books and doing CFAI questions so much easier. For professionals i strongly recomment 3rd party study solutions, you have spend 1000 on the exam whats another 1000 for books, think about the time you can save and the increase chances of passing. Anyway most professional CFA level 2 candidate in singapore earns at least $3000 so thats only 1/3 of your monthly pay even for the lowest paid candidate. A big portion may be earning more than 10k a month so this one time 1000 is "peanuts".

Do you need to attend courses, if so online or live classes

Typically attending classes run by reputable lecturers does help, especially if you have little financial background and have trouble trying to make sense of what the textbook is saying. The quality of a live class is higher, since you can ask question on the spot. For live classes some classes are held while u are sleeping so u cant ask questions directly. Beside there is more interaction and "feel" in a live class. This makes learning more interesting. The benifit of online classes is u can watch it any time, and some even allow u to watch it more than once. Some study providers do recorded their live classes so that students can view it again if they want to. Check with your provider if they provide this added service. I cannot tell you who is the best CFA or FRM lecturer, it all depends on preferences. But one thing for sure, you are your best teacher, if you dont put in the effort even having all the Chartered holders as your mentor wont do you any miracles. For those whom do not have time an online is better. Some may choose to attend crash course camps that runs like 3 whole day in a row. For some people cramping 3 whole days of info is a piece of cake to them, for me i can still handle it but i prefer my lesson to be spread out so that i have time to deeply understand what is teach today before moving into a tougher topic the next lesson. Remember most of the lessons build on knowledge of previous lessons. So my advise is revise constantly, dont wait till last min to revise.

How to choose a course
1. reputation of the lecturer
2. quality of lecturer. Ask people whom attend the course, if possible request to sit in for a preview lesson, most provider allow that if you ask.
3. what material do they provide and is it good. No point signing for a lesson if the lecture notes provide is piece of shit.
4. convience. Since most is working, near your office is top choice. Do keep in mind that you may have overtime so too far from office means you miss the lessons
5. After study support. Does the lecturer answer questions and is her explaination good. Basically having someone to ask question is one of the benifit to enrol in a course.
6. Speed of the lesson. Too slow the lecture may not cover enough vital point, too fast you catch no balls
7. Make sure the study schedule fits you. If your schedule is too random. you may consider online lessons. Do of cause pick that which have lesson while you are awake, so that you can ask live question. Asking online is not as good as asking in class but still is better than nothing
8. Price. I do have to stress quality is more important than price, but still price is important especially when the company is sponsoring you. You dont wish to spend 3000 of company money on a course and end up in the failure zone.
9: qualification of lecturer. Does he hold a chartered holder. If you sign for FRM lesson, having your lectuer holding the FRM destination is an advantage because he has first hand experiecne of the questions and materials. Also how long have he/she been teaching. The more experiece lectuers can better convey difficult concepts and answer tough questions. He/she is also more likely to know the major pitfalls and misconception students can make and highlight that in the class.

Tips.

Do not start counting when you see numbers. Some question do not require any counting. For example if you are ask to count the operation leverage of X company and there is only one choice with greater than +1 you know thats the answer.

If you are in doubt just mark in the question paper and come back later, dont spend 10 mins trying to clear your doubts.

If you find that B is the correct ans, then B it is. You can briefly look at C and D to see if they seem better, but dont carry out extensive test on C and D, even if you did find out that D is better ans the B, the time you spend may cause you the next 3 question

Dont shade the oval with the pencil upright, slant it so that there is more contact point. I thought only primary school child make this mistake but most adult do too. And unless you have gentle hands avoid using mechanical pencil. Dont worry you can bring in many pencil, you can bring in 100 if you want, so bring it more than a few, i recommend 3 to 4 with sharpener and dont forget your eraser.

Get a good quality pencil and eraser. Dont get those that breaks easily or leave stain marks all over. Get a good sharpener too, you dont want to end up with 1/4 of your exam time trying to uncork the broken lead stuck inside your sharpener

Be calm, you are there, make good use of it. There is no way you can remember everything you study so just make use of what you know and choose the best answer. Dont worry about failing the CFA and FRM exam, as more people fail then pass. Of cause no one wants to fail but if you reach that stage then dont be too harsh on yourself. If you tried your best, thats it, perhap you should try harder or change your strategy next time.

PRM vs FRM

This is the debacle between two of the most sought after risk management qualification on the market today. This short article would attempt to compare and contrast between the two. For more info please visit http://www.garp.org/ for FRM exams, and http://www.prmia.org/ for PRM and APRM info. Please do note that i held the APRM qualification and is doing the FRM exam in Nov 2009

I am expressing personal opinion on them, I would not be listing facts like salary, enrolment etc as those can be easily found on their website.

Reputation

Without doubt the FRM is more establish and have a long history. The PRM however is backed by famous university like HK university and NUS. But as far as international reputation the edge still goes to FRM.

Width of material

Ok i have did the ARPM, i have not do the PRM, but since APRM covers the entire paper 4 and around 70% of paper 3, i can safely assume that PRM is 2.5X APRM. If that was true my feeling is they both have around the same width, with FRM slightly wider, although i do felt that FRM syllubus is a little bit more quantitative intensive.

Depth of material

This one is no competition. The FRM material is way more in depth. I know you would suspect me to say PRM is better cause i hold the APRM but really FRM is more in depth. Again this is my personal opinion and other may seem to differ.

Difficulty

The PRM exam has 4 papers and you can take it one by one, no need to be in any order. If i am not wrong, if you fail you can attempt the paper 3 months later. FRM is one a year in nov, and one full paper. FRM would have a level one this 2009 nov. In 2010 FRM would switch to 2 levels held in may and nov. I dont think i have to explain that FRM is more difficult because taking one big paper is way tougher than taking 4 small paper, those whom have took CFA exams would get what i am saying. The passing mark for PRM is around 60% and FRM is 70%, putting in other words even if the FRM passing mark is reduced to 60% the FRM still edge in toughness over PRM.

expenses.

The exams fees for the PRM 4 papers are cheaper than the FRM full exam. Also FRM requires you to become a member, PRM do not. As for additional materials, for PRM you would need the books that prmia provide for a fee of cause, and some online learning tools, overall the cost is way cheaper than taking the FRM course, depending on which external material provider and package you use, it can set you back over 1500 sing$. It should cost less than 3/4 this amount for PRM. For PRM you do not really have to seek external material for help, but for FRM the material is so tough, most people cannot handle it without 3rd party material help, again the materials cost depend on what you need, some people may get special discount or even be able to get sponsor from their loving bosses.

But dont be fool by the cost, lets remember that most people take one to two tries to pass each level of PRM exams and also if you pass a paper you do not have to do it the next time, which means lower cost. For FRM if you fail the paper you retake the entire paper next time and most people i know took 2 to 3 tries with some taking more than 5 tires to pass FRM full exams. The 2 levl FRM have not really come out yet so i cannot make any conclusion.

Conclusion

Take the APRM if you are a junior in risk management, or looking to enter into risk management, You can also take it if you are indirectly involve in risk and wish to upgrade your skills. Take the PRM and FRM if you are more directly involve in risk. Most risk managers attempt to do either PRM or FRM, although some did both. Non risk professional may do CFA + CAIA, CFA + FRM, CFA + PRM etc. Do not if you are a CFA, CAIA holder as well as holder of serveral other qualifications PRM do allow paper 1 and 2 to be extempted that would save some cost and time.

So take one of them, discuss with your superior as of which is more of a fuel for your career progression. Determine how much you can spend, this include your time, money, energy. You can even consider doing an advance degree or masters in risk management. There are too many such degree out there and every one of them seem to boost that they are best in certain areas. But no doubt those masters and degrees is unlikely to beat the difficulty of the FRM, CFA exams the PRM and CAIA is easier so maybe they can be "beaten" by some of the tougher masters. Again i have not took master, all my conclusion is from friends doing masters, forum and websites. If you think your master is tougher than CFA and FRM then congrats yourself of getting one hot challege.

Financial Disaster Part 2.

Welcome back folks and my fellow fans (if there is any)

Today I am going to talk about synethic CDOs which is the culprit behind the Lame man sister bibi bond and the give me a 5 notes saga. Now what i state here is not really most accurate reflect about the truth because there seem to be slight conflit in some areas and techicality.

Traditionally CDO are created to protect investor against credit risk. Ie investors whom brough credit related products would attempt to hedged their credit risk by buying a CDO. But today most CDO are actually use for the purpose of riding on the credit exposure, which mean selling the CDOs.

Lets use a simple CDO of 2 tranches Senior and Junior. Lets say the Senior is 800 m and junior is 200m. So what happen is a bank sell to a trust 1000m worth of loans, or debts, since it is syntheic the bank would retain ownership of the 1000m debt. The SPV then sell the tranches, some book would tell you the senior have 1000m worth, some book say is less than 1000m, i am not sure who is correct, please consult your university professor. Any way lets continue

The SPV would issue 200m of loans (same value as junior) to investors usually insitutional investors. The CFs from the 200m loans is invest in low risk assets. This action help to rise credit rating

1. There is 200m of collectual
2. Cfs generated is Rf or near Rf

The SPV will enter into a swap with the bank (usually a total return swap). please do not that most spv are acutally own and in fact most are run entirely by the bank. The bank would pay total return and receive some benchmark + a spread, benchmark can be sibor, libor, prime rate etc. The gain of the bank is LIBOR + spread - cost of funding. Cost of funding is how much the bank need to obtain money to originate the loans, usually the souces of money is from deposits so cost of deposit is the cost of fund, of cause today bank have many complex products and banks also borrow from the discount window and other banks so this make souce of fund calculation a bit more complex but the basic concept would not strive far.

Now do recall there is 200m bonds but 1000m of exposure. Now how is it possible to have 1000 exposure by selling just 200m bonds, the answer is CDOs. 1000m of CDO exposure is being sold. This allow investor to have 5x more return then they would if they just have 200m bonds. But this does not come without risk. The SPV maintain first loss position for the first 200m loss. The bank maintain the next 800. Due to the chances of loss exiting 200m being rare the senior tranches typically have high rating. But this also means 2 thing.

1. the majority 800m risk lies with the bank
2. first loss of 200m lies with SPV and SPV investors

CDOs are sold which mean the investor in the SPV assume credit risk. They do receive premium on top of their loan proceeds. Usually it is the junior issue the bond and senior issue the CDS, since the senior do not issue the bond many book tend to say that senior does not require funding. Should the loss exit that of Junior which is 200m, then senior whom issue CDS would start to pay for the losses. But in a good time the loss exiting 200m is rare. But in times of pollution the 200m barrier is easily broken. Do also note there are too many varification on the structure that is beyond my understanding, some have the junior issue CDS also, some have the Senior issue CDS while the junior issue call or put option on interest or bonds. I still trying to figure out why did the bibi bond structure with first to default credit derivatives but unfortunately i am still unable to get a solid conclusion.

Next Up part 3.