Abstract
Armed with a credit default swap (CDS) position’s risk sensitivities, an investor’s ultimate goal may be some combination of the following: (i) know when to say when—that is, have an objective metric to help determine when to stop adding a particular risk to the portfolio; (ii) identify other assets with offsetting risk exposures and decide how much of those assets to use to hedge the risks embedded in the CDS position; and (iii) construct a trade that focuses more directly on the investor’s views while avoiding unintended risk exposures. We examined these topics in this chapter, proving three numerical examples along the way to illustrate the main points discussed in this chapter. We conclude the chapter by pointing out some directions in which the very simple framework discussed here can be extended for more effective applications to real-world situations.
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