Consider a fixed portfolio of emerging market bonds. You have 2 choices:

(1)

Buy

the equity

tranche of a CDO that consists of the portfolio. Assume the equity tranche is 10% of the value of

the portfolio. Or,

(2)

you can buy the portfolio directly and fund the purchase in the repomarkets. Assume the securities in the portfolio

all carrya haircut of 10%. Discuss the similarities

and differences between these 2

strategies