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Arbitrage Pricing Spread (APS)

Credit Suisse's APS model is the rigorous way to compare the value of a cash bond with that of the CDS, based on the principle of no arbitrage.

Traditional approaches focusing on spread differences between cash and CDS spreads (for example, comparing the Z-spread or asset swap spread of the bond with the CDS spread) do not always spot pricing differences between the cash and derivative markets. Bond spreads and CDS spreads are not directly comparable, and it is impossible to infer the whole CDS curve from a single bond price.

APS approaches the problem in the opposite way, using the whole CDS curve to infer the value of the bond. It works by stripping the CDS curve to obtain the survival curve and then values the bond by valuing the bond's individual cash flows using this survival curve. The CDS-derived value of the bond can then be compared to the market price to identify any mispricing. Alternatively, the CDS-derived bond price can be converted into a CDS-implied asset-swap spread and compared with the market asset-swap spread. If the CDS-implied asset-swap spread is less than the market asset-swap spread, it can be attractive to buy the bond and buy CDS protection – a negative basis trade.  

To arrange access to APS , institutional investors should consult their Fixed Income Sales representatives. Please note that APS is distributed over Credit Suisse's LOCuS platform and is not available directly over BondHub or R&A.

For more information on APS please contact the Quantitative Credit Strategy Team.

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