The Fair Basis: Funding and capital in the reduced form framework

20 Feb 2020 Wujiang Lou

A negative basis trade enters a long bond position and buys protection on the issuer of the bond through credit default swap (CDS), aiming at arbitrage profit due to the bond-CDS basis. To classic reduced form model theorists, the existence of the basis is an abnormality or merely liquidity noise... (read more)

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