The fair basis

Wujiang Lou remodels credit arbitrage by introducing funding and capital costs


Known as a credit arbitrage strategy, credit default swaps and bond basis trading rely on bond funding and residual risk management. Here, Wujiang Lou incorporates funding and capital costs into the valuation of a risky bond under a dynamic credit spread model to better understand and predict a fair basis

A negative basis trade enters a long bond position and buys protection on the issuer of the bond through a credit default swap (CDS), aiming at the profit due on a

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