Basis trade - CDS arbitrage
Afaik, a true arbitrage profit opportunity must have 0 initial net cash outlay. According to my CFA materials, with a basis trade, say if the credit spread in the bond market is higher than the CDS spread, an arbitrageur would buy the bond and also the CDS protection. This hedges out the credit risk, but because there are initial payments required to be made to enter into these 2 positions, I’m confused at how this can be called an arbitrage trading strategy? Anything I’m missing here?
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