Strategies · Library · Structured assets
§11.6Carry
CDOs – curve trades
Trade the gap between short and long maturity tranches. A flattener sells short-term and buys long-term protection when the curve is expected to flatten; a steepener does the opposite. It can be sized to be neutral on notional, risk duration or carry.
- Asset class
- Structured assets
- Held for
- Varies
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Spread difference between a long-maturity and a short-maturity tranche.
- Entry and exit
- Open the two legs when the curve looks mispriced; close when the spread gap moves as expected.
- Sizing
- Notional-neutral, duration-neutral or carry-neutral sizing across the two legs.
How it fails
- Curve moves the wrong way
- Legs sized wrong by model
- Illiquid tranches
Data it needs
- tranche spreads at two maturities
- tranche risk durations
ARCANE has no tranche, CDS or index-spread data.
How ARCANE uses it
Not usable directly. The curve-slope idea could inform a Call on bond curves if ARCANE adds that data.
Needs tranche term structure and shorting.
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, §11.6, p. 101 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.