CDO Carry Equity Tranche

Strategy 11.2: CDO Carry - Equity Tranche. Buy the equity (lowest quality) CDO tranche and delta-hedge by selling the CDS index. The hedge ratio (delta) is the risky duration of the tranche divided by the risky duration of the index: delta = D_tranche / D_index The equity tranche pays a high premium that exceeds the cost of the short index position, generating positive carry. Signal: BUY when the tranche spread is attractive -- i.e. above its rolling historical average by a configurable number of standard deviations. Required columns: tranche_spread, index_spread, risky_duration, index_duration