A swap spread trade is indeed a bet that the fixed side of the spread will remain higher than the floating side of the spread while staying within a reasonable range that can be evaluated from historical data. In a swap spread trade, the trader is essentially betting on the difference between the swap rate and the yield of a Treasury security of similar maturity. This difference is expected to remain higher than the difference between the London Interbank Offered Rate (LIBOR) and the repo rate. The trader uses historical data to evaluate a reasonable range for this difference. If the actual difference stays within this range, the trader stands to make a profit. If the difference moves outside this range, the trader may incur a loss.

Choice A is incorrect. A swap spread trade does not necessarily involve a bet that the spread between the fixed side and the floating side will widen. The direction of the spread (whether it widens or narrows) depends on various factors such as interest rate movements, credit risk, and liquidity conditions in the market.

Choice C is incorrect. Similar to Choice A, a swap spread trade does not necessarily involve a bet that the spread between the fixed side and the floating side will decrease. The direction of movement in swap spreads can be influenced by many factors which are not predictable with certainty.

Choice D is incorrect. As explained above, both Choices A and C are incorrect definitions of a swap spread trade, therefore Choice D which suggests all options are correct cannot be accurate either.

Things to Remember

• Swap Spread: The difference between the swap rate and the yield of a Treasury security of similar maturity.
• LIBOR: London Interbank Offered Rate, a benchmark interest rate at which major global banks lend to one another.