CDS Applications and the Basis Trade

Which of Noe's statements is _most likely_ accurate?

Right! Statement 1 is correct because the primary purpose of a basis trade is to exploit the differences in credit spreads between the CDS and bond market. Since the CDS spread is lower than the bond spread, an arbitrage trade can be made by buying the CDS and selling the bond.

Incorrect Statement 2 is incorrect; to profit from arbitrage opportunities, the mispricings must converge.

Incorrect. Only one of the statements is accurate.

Statement 1 only

Statement 2 only

Both Statements 1 and Statement 2