Fixed-Income Arbitrage

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DEFINITION

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.


INVESTOPEDIA EXPLAINS

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"!




RELATED TERMS
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  2. Swap

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  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute ...
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  6. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit from a difference ...
  7. Hedge

    Making an investment to reduce the risk of adverse price movements in an asset. ...
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  9. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments ...
  10. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream ...
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