1. derived" from the value of an underlying asset. An over-the-counter (OTC) derivative is a derivative instrument that is not traded on an organized exchange;Options, Futures, and other Derivatives
2. overcollateralization, equity retention, excess spread and cash reserve), (ii) structural, (i.e., through the tranche exposure to risk and the payment priority associated to the different classes of liabilities), and (iii) third-party provided (e.g., monoline companies' insurance coverage, line of credit, liquidity support and/or interest rate hedging through a swap transaction). Suresh Sundaresan, Fixed Income Markets and Their Derivatives;There are three types of credit enhancement: (i) originator-provided
3. As a major requirement, the pool shall be well diversified so that the correlation of default-related losses can be as low as possible. Indeed, given the described tranche structure, default correlation represents a key input in pricing CDOs and different tranches have different exposure to it: the value of the senior tranche depends negatively on default correlation while the value of the equity tranche depends positively on default correlation. Quality tests are commonly performed to ensure diversity of the assets;Analysis and Strategies