Credit Spread: A credit spread is the difference in yield between a U.S. Treasury bond and a debt security with the same maturity but of lesser quality. Other Feasible Techniques You Can Use To Hedge Your Credit Spread Option Strategy. when credit spreads are deemed wide and expected to narrow can improve funding ratio outcomes. And, when tactically adding credit risk to the hedge, the amount of credit risk taken must be scaled appropriately in a total portfolio context. As of June 30, 2016, the Barclays Long Government/Credit Index would well match the portfolio, with an interest hedge ratio of 100% and a spread hedge ratio of 96% (Figure 8). Spread exposure should also be considered on a total-portfolio basis, given correlations between long credit spreads and equities, hedge funds, and commodities. You can choose to purchase an in-the-money option that has the same expiration month as the contracts of your spread and one-half as many options as are on each leg of your spread. “The growth portfolio… is implicitly hedging some of the liability credit spread risk, which is not captured in the spread hedge ratio… Consider a plan that is 100% funded and has a duration of 14.0 years.
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