PPT Slide
In order that the credit arbitrage works, the funding cost of
the default protection seller must be higher than that of the
default protection buyer.
Suppose the A-rated institution is the Protection buyer, and
assume that it has to pay 60bps for the credit default swap
premium (higher premium since the AAA-rated institution
has lower counterparty risk).
The net loss of spread = (60 - 40) = 20bps.