A hedge is supposed to be a cheaper bet that pays off if a primary bet isn't profitable.

With a leveraged bond portfolio, my understanding is that a credit default swap (CDS) can help hedge, but I'm not sure what the premiums are to hold the CDS.

Bond interest rates being so low, any leverage and protection comes down to almost pinching pennies to maintain a target yield, the cost of the hedge can drastically affect the viability of the strategy.

Based on the premiums to hold CDS, and the costs to hold bonds on margin (assuming till maturity, any time frame), are CDS an adequate low cost hedge? What consequences or considerations in forming this hedge would be necessary

  • From my understanding, CDS are really only available to big, professional entities, who probably are sophisticated enough to know their appropriate uses. Is this an actual issue that you've run into, or just a theoretical one? – Jason R Jan 25 '17 at 12:52
  • @JasonR its an issue Ive run into. They are available to accredited investors as they are traded OTC, while there is also an index CDX that is tradable. Although many still hedge with just the VIX – CQM Jan 25 '17 at 16:00
  • I would note that a CDS will only hedge default risk. You still have interest rate risk when holding bonds (If interest rates rise, the value of your bonds goes down). – D Stanley Apr 17 '18 at 23:24

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