A desk can hedge every convert at the name level and still own a concentrated view on the equity market, the curve, implied volatility, or credit spreads. Calamos's answer is a portfolio overlay: trade a liquid index, futures, swap, or credit basket against the residual systematic exposure rather than patching twenty names one at a time. The overlay buys capacity and reduces transaction churn, but it creates basis risk and can accidentally neutralise the alpha the book was designed to earn.
This note sizes the four principal overlay families—index options, rates futures or swaps, volatility swaps, and CDS baskets or closed-end-fund shorts—and sets a decision rule for choosing book-level hedges over name-by-name repairs. It builds on the aggregate dashboard in Leverage, Scenario Analysis and Book-Level Hedges.
Learning objectives. By the end of this note you should be able to:
- distinguish an active single-name risk from a passive systematic residual;
- size a rough index-put, Treasury-future, and volatility-overlay hedge;
- compare a direct CDS basket with a correlation-based volatility hedge for omicron;
- explain why overlay basis and dynamic Greek drift require monitoring;
- decide when a book overlay is superior to a sequence of name-by-name patches.
In this lesson
- Start with the residual, not the instrument
- Equity-market protection with index options
- Rates: separate curve risk from funding cost
- Volatility overlays and the vega–credit link
- Credit overlays: direct basket or imperfect proxy
- When overlays beat patches
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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