Credit CPPI

A credit investment borrowing the constant proportion portfolio insurance technique (and its variants). A credit CPPI usually consists of a synthetic exposure to credit which, like in a synthetic CDO, is transferred to the investor through a credit default swap with a dealer. Credit CPPI trades can include a broader range of exposures than a synthetic CDO. They can be based on single name exposures, credit indices, index tranches, or some combination of these different instruments. Often the exposures are actively managed by an investment manager, although in other cases the basic composition of the portfolio is static. A key feature of credit CPPI transactions is that the size of the credit exposure can be adjusted over the time based on its market value. The initial investment is placed in a deposit, which is used to settle any credit events in the portfolio and to collateralise the credit default swaps. The size of the synthetic credit exposure is determined as a multiple of the reserve, which is the size of the deposit less the amount it would take to buy a zero-coupon bond which can be used to repay the principal at maturity. Returns in credit CPPIs are usually back ended. However, more recently, the technique has been applied to transactions with coupons and even those with no protection of principal.