So I understand the concept of how CDO's emerged. Solomon trader L.Ranieri essentially invented the bond market for mortgages with all the tranches which created a market, eventually intermediaries pooled the bonds and made CDO's, specific to different tranches and re-packaged and subsequently regraded.
If I were to buy a CDS on a specific CDO of say 100 bonds of mortgages, and say mid-2007,
I bought the CDS on a specific CDO from BB X, whilst BB Y, actually owns the corresponding long trade on the specific CDO (If the firm I buy the CDS from must hold the specific CDO, then just use BB X)
So, over-night the CDO value falls 10%, does the CDS rise in value 10% and get sold on later on? (Wouldn't it go bust then the CDS would be worthless as couldn't sell it?)
Or, say, every night does the person who actually holds the CDO pay the CDS holder the difference? How much/what determines who and how often the CDS holder is paid assuming the CDO loses value as people default?
Regards, trying to understand this a bit better,