Jessica is a senior portfolio manager at a large investment firm managing a significant portion of client assets allocated to high-yield bonds. In order to enhance risk-adjusted returns in her fund, she considers utilizing a credit default swap (CDS) for hedge purposes. As she evaluates the credit risk exposure, she realizes that several factors could impact the effectiveness of using a CDS. Among these are the credit quality of the underlying bonds, market liquidity, and counterparty risk associated with the CDS contracts.

Given Jessica's objective to manage credit risk effectively while still capturing upside in high-yield investments, she must decide how to approach her hedge strategy.