• Credit Derivatives

    The effect of a basis widening on the fund PnL

    Loosely speaking, a basis widening implies a mark-to-market loss of a negative basis position. But how can this effect be quantified? To provide a feel for the mechanics of such positions, we carry out a tiny case study for our fund XAIA Credit Basis on 4 June 2013. We conjecture that if the current average basis widens by 35,4 bps within one year, and no management actions are undertaken, the fund is expected to have a PnL of zero, i.e. the carry inflows of the portfolio are eaten up by the mark-to-market loss due to the basis widening. These results are obtained by the analysis described in the present article.

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