Trading Strategies
There are several common trading strategies that being used by businessman, those are:
Elementary Portfolio
Selling protection on an index of credit default swap (CDS) is an example of an elementary credit portfolio. For example, the credit index, CDX.NA.IG, consisting of 125 North American credits, will be used to provide sample calculations. The risk-profile for the CDO trades will be compared with risks incurred in simply selling protection on the index.
CDO Portfolios
Quotes on tranches referencing credit indices and market participants’ estimates of associated deltas (CS01 or Credit01 hedges)* are widely available on at least a daily frequency. These trades are sometimes based on delta-exchanges, which are ostensibly CS01 “hedges” for the tranches, which can, in certain strategies, be the long credit risk driver. We focus on three CDO trades based on such an indexed product:
I. Positive Carry Equity Tranche Trade
Sell protection on the 0 to 3 percent tranche referencing the CDX.NA.IG index and hedge CS01 exposure by buying protection on the index.
II. Positive Carry Straddle Trade
Sell protection on 0 to 3 percent of the CDX.NA.IG index and hedge CS01 exposure by buying protection on the 7 to 10 percent tranche.
III. Positive Carry Senior Mezzanine Tranche Trade
Buy protection on the 7 to 10 percent tranche of the CDX.NA.IG index and hedge CS01 exposure by selling protection on the index.