Strategies · Library · Structured assets
§11.4Carry
Carry – tranche hedging
Buy a low-quality tranche and hedge it by selling a higher-quality tranche of the same pool. The riskier slice pays more premium, so the net is positive carry while market-wide credit moves roughly cancel.
- Asset class
- Structured assets
- Held for
- To expiry
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Premium difference between a low and a high quality tranche, and the ratio of their sensitivities to spread.
- Entry and exit
- Open both legs at once; keep the hedge ratio updated; hold to expiry or unwind.
- Sizing
- Short high-quality tranche sized by the ratio of the two sensitivities.
How it fails
- Idiosyncratic losses in the low tranche
- Model risk in the hedge ratio
- Illiquid tranches
Data it needs
- tranche spreads
- default probability model
ARCANE has no tranche, CDS or index-spread data.
How ARCANE uses it
Not usable directly; it is a credit-structure idea with no ARCANE data behind it.
Needs tranche prices and a short leg.
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, §11.4, p. 100 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.