PPT Slide

50bps

annual

premium

Funding cost arbitrage – Credit default swap

A-rated institution

as Protection Seller

AAA-rated institution

as Protection Buyer

Lender to the

AAA-rated

Institution

LIBOR-15bps

as funding

cost

BBB risky

reference asset

Lender to the

A-rated Institution

coupon

= LIBOR + 90bps

funding cost of

LIBOR + 50bps

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