credit spread risk vs downgrade risk companies, certainly, countries, buying

joehogue

if spreads widen, does buying a credit spread call hedge the portfolio?

it certainly does in real life by buying cds on countries and companies!

i have seen binary puts in the schweser material but that was related to maintaining an IG portfolio.
buying a binary ratings put does not protect for spread widening without a downgrade , or am i missing something?

wake2000

Binary put only payoff if an event happens, which could be a downgrade or a default or something else.

a credit spread call pays off the difference between the spread and the strike spread if the bond widens. So it is a hedge against spreads widening.

Or thats what i learnt anyway.