Duration matching

For reading 14, it says on page 108 (bottom of page) that to capitalize on spread changes for different maturities require duration matching of positions. Then example comes up where the take a long-short position to match. But why have to do this way. Spread widens on both short end and long end of curve. Why can we not just buy protection on both ends (5 and 10) instead of buying protection on 10 year and selling protection on 5 - year. I think we would profit more than. Why we need to duration match?

Are you sure the spread is not widening more on the LT bond (more to gain than the ST end).

Assuming the question is actually saying the LT bonds spread increase relatively more than the ST bond, and you want to have a 0 cash outflow (or close to 0 cash outflow), then you buy the one expected to go up in value more. So net effect is 0 cash outlay and profit if you are correct on spread changes.

The opening sentence for §5 (p. 104) provides a clue:

As outlined in an earlier lesson, a CDS is the basic building block for strategies to manage credit risk separately from interest rate risk.

To separate credit risk management from interest rate risk management, the credit risk management strategy should be duration neutral.

I was looking at this too. Very good. As testing1234 said, to keep the cash position neutral. We did a similar type question.

To be clear, this isn’t a question about yields and maturities; it’s a question about CDSs (and, therefore, credit spreads) on IG bonds vs. HY bonds.

Thank you S2000 for page reference. This make sense.

My pleasure.