All, there is a CFAI online question that has a scenario where the manager is short a CDS to hedge the credit risk of a convertible… with the exhibit explicitly stating the rationale being to hedge credit risk.
Wouldn’t you purchase a CDS to hedge credit risk associated with a convertible?
Buying a CDS is equivalent to buying protection, which is a short risk position. You can find this in Fixed Income Reading 14
Maybe Im missing something - but the question’s exhibit had a short CDS position to hedge the credit risk associated with the convertible.
That is backwards isnt it??
Short position in CDS means they purchased CDS (which reduces the credit risk).
If you still have your Level 2 Fixed Income materials/notes, this is also mentioned in the Credit Default Swaps reading.
Well well well, sure enough…thanks so much for the help!