DEFINITION of 'FixedIncome Arbitrage'
An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixedincome arbitrage strategy, the investor assumes opposing positions in the market to take advantage of small price discrepancies while limiting interest rate risk.
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BREAKING DOWN 'FixedIncome Arbitrage'
Fixedincome arbitrage is primarily used by hedge funds and leading investment banks. The most common fixedincome arbitrage strategy is swapspread 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"!
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