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Hedged and Wedged

16 April 2014 by HCM

Over the last 2 sessions, the Itraxx Crossover index has widened by 13bps yesterday and then tightened by 11bps today. During these 2 sessions, the fair value of the iTraxx Crossover index derived from the quoted prices of its constituents has barely moved and all the volatility came from moves of the basis. The basis is strongly mean reverting but during sharp moves of the credit market, indices tend to react faster. Investors using indices to hedge portfolios of single names know that these assets move together and that the relationship between their respective prices usually does not break for long period. But at times, they can feel hedged and wedged.