Constant Recalibration & Infinite Leverage in a Universal Synthetic CDO

When SpecMat learned that NYU’s Stern was organizing a conference to commemorate/reflect on 40yrs of Black-Scholes-MERTON, we thought it might be a good time to forward an outline of a proposal to be more fully elaborated later. Here it is:

There is the question of what would happen if we were to universally distribute synthetic CDOs (in line with Of Synthetic Finance’s “Ending with a Modest Proposal”), and the subsequent distribution of risks and cash flows and ‘natural leverage’ built-into credit enhanced tranches was perpetually recalibrated in line with Merton’s (and now Ayache’s) contribution to BSM? The short answer is that we would have a universe of risk and cash flow whose distribution is constantly recalibrated, but now with infinite leverage -which may prove to be an instance of nomadic distribution. The longer answer would require a group-theorist, a financial engineer, a game theorist, and a Laplanchian psychoanalyst to model its outcome. This project would be titled “Infinite Leverage in a Constantly Recalibrated Universal Synthetic CDO” (it just rolls off the tongue, right?)

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