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CDS Basis

The basis is usually positive, occasionally negative, and arises from a combination of several factors, including

Bond identity:

The bondholder is aware of the exact issue that they are holding in the event of default

However, default swap sellers may receive potentially any bond from a basket of deliverable instruments that rank pari passu with the cash asset.

This is the delivery option held by the protection buyer

Depending on the precise reference credit, the CDS may be

more liquid than the cash bond, resulting in a lower CDS price,

or

less liquid than the bond, resulting in a higher price

Shorting the bond/asset swap may be expensive or impossible

The CDS events of default may be broader than bankruptcy/failure to pay

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