Credit Risk Management in Bond Portfolios

As a portfolio manager at a large asset management firm, you are assessing the credit risk of a new bond issuance from a corporate client. The client's industry has been undergoing significant regulatory changes that have impacted its revenues. You are particularly concerned about the impact of these changes on the creditworthiness of the company.

To mitigate this credit risk, you consider various strategies before deciding whether to include the bond in your portfolio. You weigh the relative merits of securing credit default swaps (CDS), diversifying your bond holdings, or increasing your cash reserves. Your objective is to effectively manage the credit risk associated with potentially downgrading the bond.