# CDS basis trade using Risk free rate

The CDS spread pricing model uses “Risk free rate” to discount the PV and the Z-spread also uses “Risk free rate” to compute the spread. But the given example uses repo rate that comparing to Libor:

• Z spread = 100 bps
• CDS spread = 40 bps
• Repo rate = 2% or Libor plus 20 bps

Thus, long the bond to receive at 100bps and borrow from repo at 2% or Libor plus 20 bps and buy CDS protection at 40 bps.

$$100 - (40+20) = 40bps$$

Q: Why does this example use the spread over Libor instead of the spread over “Risk free rate” (SOFR, Secured Overnight Financing Rate) in order to be consistent?

• This example (where did you find it?) is probably old and came before the use of SOFR. Mar 10 '20 at 20:35
• @noob2 I found on this paper “Trading the CDS basis by Moorad Choudhry”. But on his paper, he uses ASW spread instead of Z-spread. But it’s got me thinking tht CDS pricing model still uses a risk free rate anyway. Mar 10 '20 at 20:55
• jot.pm-research.com/content/2/1/79 2007 paper before SOFR , before LIBOR scandal. Mar 11 '20 at 1:29
• @DimitriVulis So, does this mean everyone now uses SOFR? Mar 11 '20 at 1:38
• As of March 2020, no, we're still pretty far from everyone using SOFR. Mar 11 '20 at 17:00