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Pros and cons of hedging with credit indices

What the CDX indices can do:

One way to hedge against “tail risk”

– CDX indices provide an effective hedge against a sharp and unexpected decline in the stock market

A potential P&L driver

– CDX indices allow equity investors to profit from the diverging trends in the equity and credit markets

What the CDX indices cannot do:

Not a perfect hedge

– Using credit indices to hedge equity exposure entails basis risk

Not always the cheapest hedge

– Equity futures, ETF, options collars may provide cheaper ways to hedge a long equity position

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