Single-Name Credit Default Swap (CDS) Arbitrage Mechanisms
Shih Chien University (Taiwan), Dept. of Finance and Banking
June 13, 2006
This paper seeks to clarify and explain the arbitrage trading mechanisms between (and within) debts, equity, credit, and interest rate markets, using the credit default swaps (CDS). We begin by explaining the most basic, though often confusing, concept of arbitrage - basis arbitrage. We then go on to explain other various arbitrage mechanisms. These include the arbitrage across term structure (forward curve arbitrage), arbitrage between equity and debt markets, within debt market, between equity and credit markets (the above three are called capital structure arbitrage), and between interest rate and credit markets. The basis arbitrage concept is frequently used. This paper provides a framework for thinking about the CDS arbitrage.
Number of Pages in PDF File: 60
Keywords: Credit Derivatives, Credit Default Swap, CDS, Arbitrage, Basis Arbitrage, Trading, Fixed Income, Collateralized Debt Obligations, CDO, Structured Finance, Debt Market, Capital Market, Financial Engineering, Structuring, Cross Asset, Credit Riskworking papers series
Date posted: November 8, 2007 ; Last revised: May 26, 2008
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