How do you calculate the leverage for an arbitrage fixed income

Phileas · January 27th, 2005, 1:53 pm

Hi all,I do have a quick and a simple question. How do u measure the leverage for an arbitrage fixed income porfolio using only swap. The porfolio does not have any outright position (duration neutral), only relative value trade. Any formula?Thanks

donyoshi · January 28th, 2005, 7:21 am

leverage is kinda a useles measure in fixed income and credit arb and there isn't really one defined way of calculating it. most people just look at trading notional vs. trading equity.

Phileas · January 28th, 2005, 8:04 am

Thanks Donyoshi,I dont think its possible just to specify the inherent leverage of a fund without stating a shift in the underlying.I completely agree that leverage is a useless measure but unfortunately it is widely used...and to be honest i can't understand how this type of measure could be one of the most well-know reference is so flawed.Regards

donyoshi · January 28th, 2005, 2:52 pm

well the roots of leverage as a measure of risk (in hedge funds) goes back to the early hedge funds which where global macro, cta and equity long short. so, let's say a global macro fund is long 200 worth of stock with 100 trading capital, the measure of leverage kinda made sense, same for a equity L/S who's long 100 of stock A and short 100 of stock B. Now with the RV funds which might be long 100 of bond A from credit A and short 100 of bond B from credit A, or a CDS. or the interest rate swap example you gave, the whole idea of leverage becomes pointless.