LOS 59d Index trade
Both Schwesser and Curriculum say…a short index (meaning iTraxx) position can be used to hedge a portfolio of credits or expoloit an expected increase in market-wide credit risk
But it does not make sence at all, becaus iTraxx increases when credit risk (CDS) increases…so if I am short on index (loosing) and long on credit portfolio (loosing), where is the hedge or gain on credit risk increase?
If anybody knows, thanks a lot for your hint?
your thinking is correct,
it does not says go short the index, it says that ITraxx is a " short Index " meaning that if credit risk increase you will earn money.
your example is going SHORT the “short index”, What you want to do is going Long the "short index "
" short Index " is just a way to says that the index move contrary to the market, it’s not the position you take into this index
an example of “short index” is the Itraxxx, you can go either long or short this index.
Long Itraxxx = Long the “short index”
short Itraxx = Short the “short index”
hope this help
That’s not really correct.
In CDS terminology, going long means to sell protection. ie you benefit if credit spreads narrow and the iTraxx drops.
being short an index (or a single CDS) means you have bought protection ie will benefit if the index rises.
It is a little bit different because the index moves in opposite directions but the logic is the same as a stock index. Ie if you’re long, you win if things get better, and if you’re short you win if things get worse.