Strategies · Library · Structured assets
§11.5Carry
Carry – CDS hedging
Buy a low-quality tranche and hedge with a sold single-name credit default swap that costs less than the tranche pays. The net premium is the carry, but a single name hedges the pool only loosely.
- 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 tranche versus the cost of the single-name swap, and the sensitivity ratio between them.
- Entry and exit
- Open both legs together; adjust the ratio over time; hold to expiry or unwind.
- Sizing
- Single-name swap sized by the ratio of the tranche's sensitivity to the swap's.
How it fails
- Basis risk between one name and the pool
- Default of the hedged name
- Model-dependent ratio
Data it needs
- tranche spreads
- single-name CDS spreads
ARCANE has no tranche, CDS or index-spread data.
How ARCANE uses it
Not usable directly.
Needs credit default swaps and tranche prices.
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, §11.5, p. 101 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.