Correspondence: Russ, Ray, College of Business, University of Louisville, Louisville, KY 40292, USA. Tel: +1 502 852 4832, Fax: +1 502 852 6072, E-mail: professor.ray@louisville.edu

¹Russ Ray is a professor of Finance at the University of Louisville, USA. Prior to entering academia, he worked for a Fortune 500 company and for the US Department of State as a financial economist. His research (over 90 journal articles, book sections, and conference papers) focuses primarily on risk management and derivatives. He holds a PhD in Finance from the University of Michigan, Ann Arbor, USA.

Abstract

This paper examines the newly created 'CDOs Cubed', which are the first-ever triple derivative, that is, a derivative of a derivative of a derivative. Not surprisingly, CDOs Cubed are often called, 'derivatives on steroids'. Unlike traditional derivatives, which are utilised for risk reduction and/or leveraged speculation, this innovation has created thousands of new investment assets, covering the entire spectrum of risk and return. This paper traces the evolution of this innovation, and examines how this triple derivative is created, structured, and priced.