Liquidity Risk of a Bond

Can someone pls explain me the following:

Q. Which of the following strategies best addresses the liquidity risk of a less frequently traded bond position in an active manager’s portfolio?

  1. Enter into a receive fixed, pay floating asset swap, unwinding the swap position once the illiquid bond position is sold.
  2. Sell single-name CDS protection on the illiquid bond issuer, unwinding the CDS contract when the bond is sold.
  3. Allocate the illiquid bond to the buy-and-hold portion of the investment portfolio.

According to the solution, both 1 and 2 are long risks and 3 is the correct answer.

When they say long risk, does it mean long liquidity risk? and how putting the bond into buy and hold solves the problem of illiquidity?

In this case, yes.

If you don’t plan to sell it, then its illiquidity doesn’t matter.

and why do we say that receiving fixed and pay floating or selling single name CDS is long liquidity risk? This is where I feel I don’t understand by what it means we are long liquidity

I am not sure if my approach is correct but the way I’m reading is that we don’t know if the bond is floating or fixed so we can’t make a call on the whether we should enter into a receiver or payer swap. Plus all you would be doing is hedging against interest rate risk not liquidity risk.

CDS also doesn’t address liquidity risk. It addresses credit risk - and even if it did that to some extent, selling the CDS would mean you are doubling down on your long exposure to the underlying issuer.