Fixed Income Arbitrage in a Financial Crisis (D): TED Spread and Swap Spread in May 2009
Posted: 1 Mar 2012
Date Written: January 18, 2011
The D case briefly recounts the action that investment manager Albert Mills takes in the matter of an unusually low U.S. dollar fixed-floating swap spread. He must decide what to do next.
Learning Objective: This case may be used: to introduce fixed-floating interest rate swaps; to review or introduce important interest rates and spreads, such as LIBOR, TED spread, and swap spread; to review or introduce valuation of fixed-income securities and derivatives and associated measures of price-sensitivities to interest rates; to review the Law of One Price (LOOP) and resulting opportunities when LOOP fails; to describe the mechanics of exploiting violations of LOOP; and to describe hedge fund financing arrangements, particularly repurchase (repo) agreements. The case also may be used: to discuss the causes of anomalous securities prices during the 2008 crisis; to explore causes and consequences of the 2008 crisis generally; and to discuss possible interventions by government, central banks, and other oversight bodies.
Suggested Citation: Suggested Citation