Municipal Bond Arbitrage

Municipal bond arbitrage is a strategy where investors take advantage of price discrepancies between tax-exempt municipal bonds and taxable securities. By simultaneously buying and selling these bonds or using derivatives to hedge, traders aim to profit from inefficiencies in pricing. This strategy requires sophisticated analysis and is often used by hedge funds and institutional investors.

Example

A hedge fund engages in municipal bond arbitrage by buying undervalued tax-exempt municipal bonds while shorting similar taxable bonds to profit from the price difference.