Basis trade -CDS

CFA Level II Derivatives
#1

In order to derive a basis trade why they have consider YTM of a bond -LIBOR > CDS SPREAD. I need to know why they have consider LIBOR here

#2

spread is always between 2 rates.

and LIBOR rate is what you would pay / receive for the Swap - on the floating side.

#3

Thanks but this not about basis swaps. I’m asking about the basis trade

#4

You’re comparing the credit spread on the bond to the credit spread on the CDS for that bond.

The credit spread on the bond is the bond’s YTM minus the risk-free rate for that maturity; LIBOR is an example of the risk-free rate.

The problem with a basis trade is that the spread of the bond’s YTM over LIBOR is not exclusively a credit spread; separating out the credit spread from the other premia isn’t easy.