Hedging Credit Risk in Fixed Income Portfolio Management

As a fixed income portfolio manager, you are evaluating an opportunity to invest in a bond issued by a company that is currently on the downgrade watch list from credit rating agencies. The company has recently reported lower-than-expected earnings, and market sentiment is increasingly negative. However, the bond offers a significantly higher yield compared to similar securities in the market.

Your investment philosophy emphasizes risk-adjusted return and you are considering how this investment might impact the overall portfolio risk profile. Which of the following strategies best addresses the potential credit risk associated with this investment?