Strategy #0000000124 · Credit derivatives and relative value
Equity-credit capital-structure relative value
Enter market/model spreads, divergence threshold, hedge ratio, equity/CDS moves and notional.
Capital-structure arbitrage compares equity and credit markets for one issuer. Structural models use equity price, volatility and leverage to estimate a theoretical credit spread; traders take CDS positions when market spreads diverge and hedge with equity. Model risk, CDS liquidity, default jumps, recovery, funding and hedge-ratio error can cause large losses.
Omits CDS premium-leg valuation, default payment, recovery, margin and equity-delta estimation.
Three ways in
Understand the story. Then inspect the risk.
Start with a familiar situation, check the payoff, then test how the numbers change.
The idea · in two minutes
After model/market CDS spreads diverge, what does the directional position plus equity hedge imply?
Capital-structure arbitrage compares equity and credit markets for one issuer. Structural models use equity price, volatility and leverage to estimate a theoretical credit spread; traders take CDS positions when market spreads diverge and hedge with equity. Model risk, CDS liquidity, default jumps, recovery, funding and hedge-ratio error can cause large losses.
Enter market/model spreads, divergence threshold, hedge ratio, equity/CDS moves and notional.
Omits CDS premium-leg valuation, default payment, recovery, margin and equity-delta estimation.
- Input assumptionsEnter market/model spreads, divergence threshold, hedge ratio, equity/CDS moves and notional.
- Model outputOmits CDS premium-leg valuation, default payment, recovery, margin and equity-delta estimation.
Illustrative research examples only. They are not live signals or a recommendation.
The mechanics · payoff and exposure
Mispricing=s_{CDS}^{market}-s_{CDS}^{model},\quad P\&L\approx\Delta CDS+\Delta Hedge-C
CDS spread change is entered in bp and notional in currency; simplified output omits contract cash flows.
Greeks: the directional intuition
- 模型
- Measures sensitivity to implied volatility.
- 合約
- Measures sensitivity to implied volatility.
- 執行
- Measures sensitivity to implied volatility.
Mispricing=s_{CDS}^{market}-s_{CDS}^{model},\quad P\&L\approx\Delta CDS+\Delta Hedge-C
Practical context · published observations
Equity-credit capital-structure relative value: read the record with its caveats.
The chart uses the published figures or explicitly labelled study inputs below. A historical index or model replay is not the same as an investor’s realised account return.
Omits CDS premium-leg valuation, default payment, recovery, margin and equity-delta estimation. Source ↗ · Methodology ↗
Change assumptions and inspect the scenario
Inputs illustrate the strategy mechanics; they are not live quotes, forecasts or investment advice.
Variants · same family, different risk levers
Models, contract terms and implementation can change results.
Compare relevant mechanisms and execution assumptions.
| Related strategy | Relationship | What changes | New cost or risk |
|---|---|---|---|
| Base scenario | Manual inputs | Capital-structure arbitrage compares equity and credit markets for one issuer. Structural models use equity price, volatility and leverage to estimate a theoretical credit spread; traders take CDS positions when market spreads diverge and hedge with equity. Model risk, CDS liquidity, default jumps, recovery, funding and hedge-ratio error can cause large losses. | Omits CDS premium-leg valuation, default payment, recovery, margin and equity-delta estimation. |
| Conservative version | Higher cost/loss | Stress higher costs, larger losses or lower liquidity. | May lower scenario returns. |
| Validation version | Data review | Test model inputs with consistent contracts and timestamps. | Needs licensed, representative data. |
Omits CDS premium-leg valuation, default payment, recovery, margin and equity-delta estimation.
Read beyond the summary
References
Primary sources and research used to describe the strategy and its limits.