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The credit default swap basis: analysing the interplay between cash and synthetic markets,
published in the 2003/04 Euromoney Derivatives Yearbook.
In this article we consider the close relationship between the synthetic and cash markets in corporate credit. This relationship manifests itself most clearly in the shape of the credit default swap basis, the difference between the cash market asset swap spread and the same-reference credit default swap spread.
First, we consider briefly why the synthetic market price spread will necessarily differ from the cash spread.
We then look in further detail at the factors that drive the basis and the implications this has for market participants.
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