Credit risk in the context of a dynamic protection strategy
In the context of an asymmetric risk management the embedded short put option of a corporate bond means that the portfolio manager faces additional negative gamma. Dynamic risk management for a corporate Bond portfolio is therefore a highly challenging task for the portfolio manager. In some respect, the risk profile is similar to a dynamic protection portfolio which has mainly equity exposure. Credit risk in the context of a dynamic protection strategy has certain similarities to equity risk although it is not a perfect substitute. Both asset classes have fat-tailed return distributions. A rise in equity volatility frequently goes hand in hand with falling stock prices as well as widening credit spreads. As dynamic portfolio protection grew in the equity market portfolio managers have had ample opportunities to gather experience on how these strategies perform in different market environments and especially where the potential danger zones are located.
