Strategy #0000000035 · Credit relative value and arbitrage
CDS–bond basis relative value
Define the basis sign first, then separate convergence, carry and executable costs.
The CDS–bond basis compares CDS protection cost with a cash-bond credit spread. A common negative-basis trade buys the bond and CDS protection. Funding, repo, deliverability, recovery, liquidity, capital and counterparty risk can keep the gap open, so it is not risk-free arbitrage.
A same-issuer CDS and bond spread can be compared, but liquidity, funding and credit events make the gap risky.
Three ways in
Understand the story. Then inspect the risk.
Start with a familiar situation, check the payoff, then test how the numbers change.
The idea · in two minutes
How much of a CDS–bond spread gap remains after all frictions?
Rose sees a bond spread 40 bp wider than a same-maturity CDS and Jack calls it 40 bp of arbitrage income.
They align spread definitions, tenor, currency and issuer, then subtract repo/funding, CDS premium, bid–ask and holding costs. They also verify deliverability, reference obligations and credit-event settlement.
In stress, bond liquidity discounts and funding needs can widen the basis. Margin or redemptions may force a trade out before convergence. The simulator only calculates assumed basis convergence; it does not model default or fills.
- Spot plus fundingOutput is index points; it is not executable arbitrage or a convergence forecast.
- Less assumed dividendsUses a continuous-carry approximation; excludes constituent dividends, tax, borrow, impact, margin and actual contract specs.
- Market futures minus fair value, less costIllustrative expiry outcome.
Illustrative research examples only. They are not live signals or a recommendation.
The mechanics · payoff and exposure
\operatorname{ConvergencePnL}\approx CS01\cdot (|Basis_{entry}|-|Basis_{exit}|)-Costs
S₀ is spot, r funding, q expected dividend yield and T time to expiry in years. The continuous-compounding equation is an approximation; contract pricing uses dividend points and settlement rules.
Greeks: the directional intuition
- 股息估計
- Measures sensitivity to implied volatility.
- 執行基差
- Measures sensitivity to implied volatility.
- 保證金
- Measures sensitivity to implied volatility.
\operatorname{ConvergencePnL}\approx CS01\cdot (|Basis_{entry}|-|Basis_{exit}|)-Costs
Practical context · published observations
CDS–bond basis relative value: read the record with its caveats.
The chart uses the published figures or explicitly labelled study inputs below. A historical index or model replay is not the same as an investor’s realised account return.
使用連續複利簡式，不含逐檔股息、交易稅、借券、衝擊成本、保證金或實際合約規格。 Source ↗ · Methodology ↗
Change assumptions and inspect the scenario
Inputs illustrate the strategy mechanics; they are not live quotes, forecasts or investment advice.
Variants · same family, different risk levers
Related implementations change different assumptions.
Each row distinguishes the changed mechanism and its trade-off.
| Related strategy | Relationship | What changes | New cost or risk |
|---|---|---|---|
| Positive-basis cash-and-carry | Future rich | Buy cash and sell futures through settlement. | Funding and basket transaction costs. |
| Reverse cash-and-carry | Future cheap | Short cash basket and buy futures. | Borrow availability and dividend compensation. |
| ETF-futures basis | ETF proxy | Use a liquid ETF to proxy the cash index. | ETF fees and NAV basis remain. |
Uses a continuous-carry approximation; excludes constituent dividends, tax, borrow, impact, margin and actual contract specs.
Read beyond the summary
References
Primary sources and research used to describe the strategy and its limits.