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Posted on Jun 26, 2024

You think the credit condition of XYZ is about to deteriorate, so you decide to short some of XYZ's bond to profit from the rise

You think the credit condition of XYZ is about to deteriorate, so you decide to short some of XYZ's bond to profit from the rise in credit spread (and thus the expected rise in the YTM of the bond). What is the main problem with this strategy? Describe qualitatively how you can fix this trade.

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