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A six-year CDS on a AA-rated issuer is offered at 150bp with semiannual payments while the yield on a six-year annual coupon bond of this issuer is 8%. There is no counterparty risk on the CDS. The annualized LIBOR rate paid every six months is 4.6% for all maturities. Which strategy would exploit the arbitrage opportunity? How much would your return exceed LIBOR?
A. Buy the bond and the CDS with a risk-free gain of 1.9%.
B. Buy the bond and the CDS with a risk-free gain of 0.32%.
C. Short the bond and sell CDS protection with a risk-free gain of 4.97%.
D. There is no arbitrage opportunity as any apparent risk-free profit is necessarily compensation for being exposed to the credit risk of the issuer.
Computation of Future Values and Present Values by using the appropriate interest table, answer each of the following questions.
consider the following performance data for two portfolio managers a and b and a common benchmark
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