Fixed-Income Arbitrage


DEFINITION of 'Fixed-Income Arbitrage'

An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income arbitrage strategy, the investor assumes opposing positions in the market to take advantage of small price discrepancies while limiting interest rate risk.

BREAKING DOWN 'Fixed-Income Arbitrage'

Fixed-income arbitrage is primarily used by hedge funds and leading investment banks. The most common fixed-income arbitrage strategy is swap-spread arbitrage. This consists of taking opposing long and short positions in a swap and a Treasury bond. Such strategies provide relatively small returns and, in some cases, huge losses. That's why these strategies are often referred to as "picking up nickels in front of a steamroller"!

  1. Swap

    A derivative contract through which two parties exchange financial ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  4. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  5. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic ...
  6. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
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