When credit risk rears its ugly head

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It is November 2003, and the rumours swirling around embattled Parmalat begin to firm up. It becomes clear that something is badly wrong at the Italian food giant. In Milan, its shares go into freefall. Credit spreads begin to blow out. And investment managers begin selling its equity and debt, or ensuring that their portfolios are hedged.

But what if a hedge fund manager didn't realise he had credit exposure to Parmalat? Or even that he thought he had hedged his long position, only to disco

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