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Hedging Systematic Risk in High Yield with Equity Derivatives

In: Derivatives Applications in Asset Management

Author

Listed:
  • Arik Ben Dor

    (Quantitative Portfolio Strategy, Barclays Capital)

  • Jingling Guan

    (Quantitative Portfolio Strategy, Barclays Capital)

Abstract

This chapter examines strategies for managing systematic risk in high-yield credit portfolios. It highlights the limitations of traditional approaches, such as shorting high-yield index credit default swaps, due to basis risk between cash and synthetic markets during stress periods. Instead, it demonstrates the effectiveness of equity index derivatives in hedging high-yield portfolios, particularly a combination of equity futures and put options, which effective reduces hedging cost compared to a pure equity futures overlay. The study underscores that equity futures and options offer effective hedging reliability, particularly during volatile market conditions when effective hedging is most important. Cross-asset instruments offer effective hedging ability due to the strong linkage between high-yield bonds and synthetic equity markets. It illustrates refining hedging strategies with additional economic indicators to enhance accuracy and flexibility.

Suggested Citation

  • Arik Ben Dor & Jingling Guan, 2025. "Hedging Systematic Risk in High Yield with Equity Derivatives," Springer Books, in: Frank J. Fabozzi & Marielle de Jong (ed.), Derivatives Applications in Asset Management, chapter 0, pages 275-297, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-86354-7_17
    DOI: 10.1007/978-3-031-86354-7_17
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