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Negative basis

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Negative basis
Negative Basis exists when the cost of buying protection (in the credit derivatives market) on a particular reference entity is less than the Credit spread (generally expressed as a spread to Libor) on a Bond or note of similar maturity issued by that reference entity. When this occurs, investors can lock in riskless profit by buying bonds and buying credit protection. These Arbitrage opportunities are generally only available to investors whose cost of funds is Libor flat or better (since funding the Bond or note at Libor plus a spread Will erode the Arbitrage). Technical factors between the Bond and credit derivatives market account for negative Basis.
Posted by  Privatebanking.com
 
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