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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 1-week 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 sell-offs

Source: UBS, Bloomberg

Focus on the “tail”

-4.7%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

61

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