RT Journal Article
SR Electronic
T1 Application of Credit Derivatives In Portfolio Management
JF The Journal of Derivatives
FD Institutional Investor Journals
SP jod.2022.1.146
DO 10.3905/jod.2022.1.146
A1 Sameer Kackar
A1 Kelly Rogal
YR 2022
UL https://pm-research.com/content/early/2022/01/05/jod.2022.1.146.abstract
AB The use of credit derivatives has grown considerably over the past decade, with participation from a diverse set of institutional investors. Specifically, investors increasingly are using credit default swaps (CDS), credit default swap indices (CDX), and options on CDX to manage their portfolios. In this article, the authors demonstrate how investors apply credit derivatives in the context of portfolio management. The authors show how CDS can be used to create synthetic corporate bonds and how investors structure basis trading opportunities by taking advantage of mispricing between CDS and corporate bonds. Further, the authors illustrate how investors apply options on CDX for the purpose of hedging the tail risks of a fixed income portfolio, and include a discussion on various methods to reduce the cost of such tail-risk-hedging strategies.