Abstract This paper analyzes the loss allocation to first, second, and third loss positions in European collateralized debt obligation transactions. The quality of the underlying asset pool plays a predominant role for the loss allocation. A lower asset pool quality induces the originator to take a higher first loss position, but, in a synthetic transaction, a smaller third loss position. The share of expected default losses, borne by the first loss position, is largely independent of asset pool quality but lower in securitizations of corporate loans than in those of corporate bonds. Originators with a good rating and low Tobin’s Q prefer synthetic transactions.

Our main goal is to investigate the question of which interest‐rate options valuation models are better suited to support the management of interest‐rate risk. We use the German market to test seven spot‐rate and forward‐rate models with one and two factors for interest‐rate warrants for the period from 1990 to 1993. We identify a one‐factor forward‐rate model and two spot‐rate models with two factors that are not significantly outperformed by any of the other four models. Further rankings are possible if additional criteria are applied.