Hi guys, just a quick question because it seems that I got confused. If you have a bond in your portfolio and you want to hedge for credit risk, are you buying or selling the CDS?
Buying. When you buy the CDS (protection), the CDS seller is “long the credit risk”
You’re the CDS buyer (protection leg) and the counter party is the CDS seller (premium leg).
The way I think about it: with a CDS, you are buying/selling the underlying company’s credit.
So if you are long their credit, meaning you don’t expect an issue, you would sell a CDS. If you are short their credit, meaning you think something will or might happen, then you buy a CDS.
Or just think of it as the exact opposite of all the other derivatives. Long = sell, Short = buy