Question: Assume that five year yield for a rating class B is 9% and the five year risk-free rate is 5%. Let the relevant Credit Default

Assume that five year yield for a rating class B is 9% and the five year risk-free rate is 5%. Let the relevant Credit Default Swap rate be 2%. Is there any room for arbitrage?

a. An investor can invest at 9% and hedge with the Credit Default Swap at 2 %. The investor receives then risk-free yield of 7%

b. Borrow at 9% and write a Credit Default swap

c. There is no room for arbitrage

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