Effective Strategies for Credit Risk Management

In the context of credit risk management, financial institutions often seek methods to mitigate potential losses arising from counterparty defaults. One common strategy is to implement credit derivatives, which can help manage this risk by providing a form of insurance against defaults.

Consider an asset manager evaluating two different credit-linked notes (CLNs) that offer exposure to similar underlying credits but vary in their structures and terms. Effective credit risk management requires not just understanding the potential returns, but also the associated risks of each instrument.

Which of the following strategies would most effectively enhance the credit risk management of the asset manager’s portfolio?