Strategy #0000000049 · Structured credit and tail risk
CDO tranche carry and index hedging
Separate tranche income, hedge spread, funding and tranche repricing; carry is not guaranteed return.
CDO tranche carry may buy a wider-spread junior tranche and hedge part of its spread delta with a credit index, another tranche or CDS. The headline spread difference is not risk-free income: tranche losses depend on portfolio defaults, correlation and attachment/detachment points, while the hedge has basis and jump risk. The simulator only combines assumed annual spread carry, funding, spread shock and costs.
Credit tranches are highly sensitive to default correlation and tail loss; linear spread approximations miss tranche nonlinearity.
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
How much tranche carry remains after index hedge, funding and a credit-spread shock?
Jack sees a junior tranche spread 400 bp wider than a credit index and calls the gap fixed carry. Rose asks for hedge ratio, funding cost, holding period and an adverse spread-widening assumption.
The tool adds annualised spread income net of index hedge and funding, then estimates first-order repricing from tranche duration. It is a local sensitivity, not a tranche cash-flow model.
Default correlation changes tranche loss distributions; index-delta neutrality can still leave large correlation risk. Liquidity, margin and counterparty risks can worsen together in stress.
- Junior tranche spread assumptionEnter tranche and index spreads, hedge ratio, funding, holding days, tranche duration and adverse widening.
- Hedge spread × assumed hedge ratioNo default waterfall, tranche correlation, recovery, jumps, CDS basis, margin calls or cash flows; first-order assumed scenario only.
- Net carry less funding and credit shockIllustrative expiry outcome.
Illustrative research examples only. They are not live signals or a recommendation.
The mechanics · payoff and exposure
Carry_{net}=s_T-hs_H-f,\quad R_{scenario}=Carry_{net}\frac{d}{36500}-D_T\frac{\Delta s_T}{100}-C
sT is tranche spread in annual bp, h the hedge spread-exposure ratio, sH hedge spread, f funding bp and D tranche spread duration. Result approximates percent of notional.
Greeks: the directional intuition
- 違約與相關性
- Measures sensitivity to implied volatility.
- Delta 與基差
- Measures sensitivity to implied volatility.
- 融資與流動性
- Measures sensitivity to implied volatility.
Carry_{net}=s_T-hs_H-f,\quad R_{scenario}=Carry_{net}\frac{d}{36500}-D_T\frac{\Delta s_T}{100}-C
Practical context · published observations
CDO tranche carry and index hedging: 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.
無違約瀑布、分券相關性、回收率、跳躍、CDS基差、融資追繳或現金流；僅為一階假設情境。 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
Related methods change the mechanism or risk.
Compare their signal, hedge and model assumptions.
| Related strategy | Relationship | What changes | New cost or risk |
|---|---|---|---|
| Equity tranche / index hedge | Junior tranche | Uses a credit index to hedge part of spread delta. | Correlation and attachment risk. |
| Tranche-on-tranche hedge | Relative tranche | Offsets some risk with a senior or other tranche. | Basis, tenor and surface risks. |
| CDS hedge | Single-name credit | Uses single-name CDS against an underlying issuer. | Counterparty and portfolio mismatch. |
No default waterfall, tranche correlation, recovery, jumps, CDS basis, margin calls or cash flows; first-order assumed scenario only.
Read beyond the summary
References
Primary sources and research used to describe the strategy and its limits.