- Collaterized Debt Obligation(CDO)
- A CDO is a collection of loans and/or bonds. Rather than pay out the money received from the interest and principle payments to all of the investors equally, the CDO makes payments to investors in a specific order. The investors who are paid first take the least amount of risk since the the majority of the loans would have to default for there to be no money to make the first payments. The investors who are paid last take the most risk and could lose their entire investment with only a few defaults.
- Credit Default Swap
- The most obvious source of risk in a loan is that the borrower can’t pay back the the amount loaned and interest. A credit default swap is a put on this risk. The idea is relatively old but often has been referred to by its insurance title, for instance private mortgage insurance for home owners who don’t put up a large enough down payment or municipal bond insurance.
- Option Writer
- The entity that sell an option.
- The right but not the obligation to purchase an asset at a specified price. The writer of put makes money when the value of an asset increases. Many forms of insurance have put like characteristics. Some forms of property casualty insurance can be seen as a pure put. If the asset is destroyed, it has no value but the insurance company agrees to purchase it a specified price.