CDS: convexity trades

--hedge a long term discount cash bond with a short to intermediate term protection --even notional: 10 mil cash bond + 10 mil CDS --jump to default (default exposure in BB): ensure neutral cash flow following a credit event. So for a discount bond, less than 10 mil CDS is needed to hefge 10 mil cash bond --DvV01 neutral: cash flow neutral for small spread moves. This strategy makes profit when credit event occurs. --most convexity trades use jump-to-default neutral hedge ratio. Yet jump-to-default neutral trades remain long spread risk. Investors will lose money if credit quality deteriorate, wihtout a corresponding credit event. In order to be neutral P&L for smaller spread moves, investors have to run DV01 neutral hedge. --the reason investors are still long the risk is because the duration of cash bonds is larger than the duration of CDS with less than 10 mil notional amount.