Buying a convert and shorting stock still leaves you long issuer credit. Asset swaps and Ascots package that credit away (or isolate equity optionality); single-name CDS overlays hedge CS01 when a full strip is unavailable. This note is the credit-side complement to The Delta-Neutral Convertible Hedge equity hedge.
Learning objectives. By the end of this note you should be able to:
- describe a convertible asset swap and an Ascot economically;
- size a CDS overlay against convertible CS01;
- state basis and documentation risks that remain after the overlay;
- choose strip vs overlay vs "live with omicron."
In this lesson
- Asset swaps and Ascots
- CDS overlays
- What an asset swap actually separates
- CDS as a granular credit overlay
- Basis and documentation are live risk factors
- Strip, overlay, or retain credit?
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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