credit risk premium( spread jo hai) spread in bond mkt(jo hona chaihe)
Bond A 85.40 BP < 194
Bond B 205.60 BP 165
Means for Bond A CDS is underpriced and we should buy the CDS, as per my notes under this case buy the bond also?
but here we are selling the bond as per the answer.
Someone please explain me the Basis Trade on what I am misunderstanding.
Consider this spread as I/Y, so, bond ka spread should be more than what it is & we know when I/Y is low price is high. Sly, CDS ka spread is presently more than what it should’ve been so we should sell(long) the CDS thereby, receiving a higher spread & we must also sell the bond bcoz rn the price is high & later if convergence occur price will fall & we’ll earn by buying the bond then.
Hope your doubt is addressed. Thank you.
I got the logic what you stated but in my notes I have written if the CDS spread is overpriced we are buying the risky bonds? I am sharing the picture please take a look.
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Just check Ayushi, you’ve written sell bond & sell CDS which is what I was saying.
Let me give another try, CDS ka spread is more than what it should be so if it was a stock what would you’ve done? Bought it or sold it? Obviously sell & if the risky bond’s spread (consider it as I/Y for ease) was less than what it should be, matlab price was more than it should be, what would you’ve done? Bought it or sold it? Obviously sold it.
Hope now you’re okay! If not do lmk. Thank you.