Why is the calibration of a credit risk model to the market important in fixed income trading?
Answer to relevant QuestionsA corporate bond portfolio manager was overhead asking:“Why do I need a credit risk model. I can get information about the probability of default from credit ratings?” How would you respond to this portfolio manager? How can structural models be used by bond portfolio managers? What are the limitations of using duration and convexity measures in active portfolio strategies? This excerpt comes from an article titled “Eagle Eyes High-Coupon Callable Corporates” in the January 20, 1992, issue of BondWeek, p. 7: “If the bond market rallies further, Eagle Asset Management may take profits, ...Answer the below questions. (a) What is meant by the duration problem associated with a market-cap-weighted bond market index? (b) Why is the duration of bond index a “historical accident”? (c) What is meant by the ...
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