hard · Debt Capital Markets
In a negative-basis trade, an arbitrageur buys a physical corporate bond trading at a G-spread of 250 bps and simultaneously buys 5-year CDS protection on the same issuer at 180 bps.
If the investor finances the bond in the Repo market at GC - 20 bps (LIBOR being GC equivalent), what is the primary risk inherent in this 'nearly credit-hedged' position?
- The investor is exposed to parallel upward shifts in the risk-free yield curve.
- The basis will widen if the credit quality of the issuer improves significantly.
- The repo cost will decrease if the bond goes 'on special'.
- The bond may experience a 'jump-to-default' where the CDS recovery differs from the bond's market value.
Sign up free to see the explanation and track your rank →
More Debt Capital Markets practice
- In the context of Debt Capital Markets, what is a leverage-based margin ratchet?
- Which officer of a borrower is typically responsible for signing the compliance certificat
- Why is the Administrative Agent's role important for the margin ratchet?
- If a company has a leverage-based pricing grid and SOFR rises significantly while leverage
- What is meant by the 'bond floor' in the context of yield analysis?
- For a bond trading at a discount (below par), which yield measure is typically the same as
- What is a 'call schedule' for a corporate bond?
- If a bond's Yield to Worst is equal to its Yield to Maturity, what can we likely conclude