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Which of the following statements regarding CDO-squared is correct? I. CDO-squared use other CDOs and CMOs as collateral. II. Risk assessment of CDO-squared is almost impossible due to their complexity. III. CDO-squared have lower credit risk than CMOs but higher than CDOs.
Correct Answer: B
CDO-squared instruments use other CDOs and CMOs as collateral (Statement I). Due to their complexity, risk assessment of CDO-squared is almost impossible (Statement II). The statement that CDO-squared have lower credit risk than CMOs but higher than CDOs (Statement III) is incorrect; typically, CDO-squared instruments have higher risk due to the additional layer of complexity and leverage.