Credit Derivative Trading Strategies

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  • Basis Trades: Made based on the difference between a bond's yield and the CDS premium.

  • Curve Trades:

  • Flattener: Buy the short term CDS and sell the long term CDS

  • Steepener: Sell the short term CDS and buy the long term CDS

  • Index Trades: An investor can buy or sell a credit index

  • CDS Basket Trades (or Correlation Trades): Credit protection can be sold on an entire portfolio of bonds; the seller pays only for the individual issue that defaulted and the basket continues.

  • First to Default Baskets: seller will deliver the entire notional amount of the basket once the first default takes place.

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