Strategies · Library · Structured assets
§11.3Carry
Carry, senior/mezzanine – index hedging
Sell protection-style exposure on a higher-quality tranche and hedge by buying the credit index. The index pays more premium than the short tranche costs, so the gap is carry. It is roughly the opposite of the equity tranche trade.
- Asset class
- Structured assets
- Held for
- To expiry
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Premium on the index versus the premium owed on the short tranche, and the tranche-to-index sensitivity ratio.
- Entry and exit
- Open the short tranche and long index together; rebalance the hedge; hold to expiry or unwind.
- Sizing
- Index position sized by the same sensitivity ratio as the equity version.
How it fails
- A wave of defaults reaches the senior slice
- Model-dependent hedge ratio
- Thin tranche markets
Data it needs
- tranche spreads
- index CDS spreads
- default probability model
ARCANE has no tranche, CDS or index-spread data.
How ARCANE uses it
Not usable directly. Only as background when a Call discusses how credit markets price systemic risk.
Needs shorting a structured product and credit derivatives.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §11.3, p. 100 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.