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Credit derivatives terminology

By Vinod Kothari

 

 

Delta trading:  A trading strategy where a trader takes a view on the delta, that is the ratio of the change in the market prices, of a tranche and that of the overall index, or of two tranches. Thus, if the delta between the 4-7% tranche and that of the index is 5, and the current spreads for the 4-7% tranche and the index are 200 bps and 50 bps  respectively, a trader might buy protection on 4-7% tranche, and sell protection for 5 times as much value on the index, and bag a profit, while the delta indicates that the trader is fully hedged.

 

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