Hedging Systematic Risk in High Yield with Equity Derivatives

Arik Ben Dor () and Jingling Guan
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Arik Ben Dor: Quantitative Portfolio Strategy, Barclays Capital
Jingling Guan: Quantitative Portfolio Strategy, Barclays Capital

Chapter Chapter 17 in Derivatives Applications in Asset Management, 2025, pp 275-297 from Springer

Abstract: Abstract This chapter examines strategies for managing systematic risk in high-yield credit portfolios. It highlights the limitations of traditional approaches, such as shorting high-yield index credit default swaps, due to basis risk between cash and synthetic markets during stress periods. Instead, it demonstrates the effectiveness of equity index derivatives in hedging high-yield portfolios, particularly a combination of equity futures and put options, which effective reduces hedging cost compared to a pure equity futures overlay. The study underscores that equity futures and options offer effective hedging reliability, particularly during volatile market conditions when effective hedging is most important. Cross-asset instruments offer effective hedging ability due to the strong linkage between high-yield bonds and synthetic equity markets. It illustrates refining hedging strategies with additional economic indicators to enhance accuracy and flexibility.

Keywords: Basis risk; Equity derivatives; High-yield credit; Options hedging; Systematic risk (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-86354-7_17

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DOI: 10.1007/978-3-031-86354-7_17

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