@talebi818 that's correct, in the "no aribtrage" (no basis trade or carry = 0), the bond yields +5% but it costs -2% to fund the purchase of the bond; i.e., naked bond = +3% net spread. Then investor hedges default by purchasing CDS at cost of 3% which brings carry to zero. So: +5 bond spread - 2% borrowing - 3% CDS = 0.
can you please also do CDS (options trade)?
saraabsar 3 months ago
if i get through my internship all right, you're part of success! x
LuvLondon2010 1 year ago
So the investor is still getting the 5% yield even though he lost 2% from the repo and lost the 3% for the CDS?
talebi818 1 year ago
@talebi818 that's correct, in the "no aribtrage" (no basis trade or carry = 0), the bond yields +5% but it costs -2% to fund the purchase of the bond; i.e., naked bond = +3% net spread. Then investor hedges default by purchasing CDS at cost of 3% which brings carry to zero. So: +5 bond spread - 2% borrowing - 3% CDS = 0.
bionicturtledotcom 1 year ago