–
Hedge ratio should be about 2.1 times (4.7%/2.2%)
3) Estimate the appropriate hedge ratio
–
$217,160 / $10,000,000 = 2.2%
–
$3,560x 61= $217,160
–
It widened an average of 61bp
2) Estimate the expected performance of the HY Index during major
r sell

offs
–
HY9 would result in a profit of about $3,560
–
That means for every 1bp of widening, a $10mm short position in
the
–
HY CDX9 has a DV01 of about $3,560 for $10mm of notional exposure
re
1) Find the DV01 of the HY Index
Hedge ratio
–
Hedge ratio should be about 2.1 times (4.7%/2.2%)
3) Estimate the appropriate hedge ratio
–
$217,160 / $10,000,000 = 2.2%
–
$3,560x 61= $217,160
–
It widened an average of 61bp
2) Estimate the expected performance of the HY Index during major
r sell

offs
–
HY9 would result in a profit of about $3,560
–
That means for every 1bp of widening, a $10mm short position in
the
–
HY CDX9 has a DV01 of about $3,560 for $10mm of notional exposure
re
1) Find the DV01 of the HY Index
Hedge ratio
S&P 500 average 1week change in %
75
50
25
0
25
50
75
HY Index average 1 change in bp
Estimate the appropriate hedge ratio: Focus on the big selloffs
Source: UBS, Bloomberg
Focus on the “tail”
4.7%
6.0%
4.0%
2.0%
0.0%
2.0%
4.0%
6.0%
61