CAS Exam 9 Spring 2017, Question 14
Study guide: Exam 9
An asset manager has a fund composed entirely of A-rated catastrophe (CAT) bonds. They have an equal amount invested in bonds that are hurricane-exposed and earthquake-exposed. The manager then creates two pools of bonds in order to manufacture collateralized debt obligations (CDOs): one from the hurricane bonds, and another from the earthquake bonds. Both CDOs are structured to maximize the amount of notional value in the AAA-rated tranches.
Part a (0.75 points)
Explain how the manager could have designed the CDOs differently so that an even larger proportion of the tranches are AAA-rated and why this is an effective mechanism.
Part b (0.5 points)
Explain a technique the manager can use to potentially issue even more AAA-rated securities.
Answer this question and see the worked solution