ABSTRACT
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3.1 INTRODUCTION The recent development in credit markets is characterized by a flood of innovative credit risky structures. State-of-the-art portfolios contain derivative instruments ranging from simple, nearly commoditized contracts such as credit default swap (CDS), to firstgeneration portfolio derivatives such as first-to-default (FTD) baskets and collateralized debt obligation (CDO) tranches, up to complex structures involving spread options and different asset classes (hybrids). These new structures allow portfolio managers to implement multidimensional investment strategies, which seamlessly conform to their market view. Moreover, the exploding liquidity in credit markets makes tactical (short-term) overlay management very cost efficient. While the outperformance potential of an active portfolio management will put old-school investment strategies (such as buy-and-hold) under enormous pressure, managing a highly complex credit portfolio requires the introduction of new optimization technologies (Bluhm and Overbeck, 2007; Felsenheimer et al., 2005).
