a premium. Another common arbitrage strategy aims to exploit the fact that the swap-adjusted spread of a CDS should trade closely with that of the underlying cash bond issued by the reference entity. Misalignment in spreads may occur due to technical reasons such as: Specific settlement differences Shortages in a particular underlying instrument The cost of funding a position Existence of buyers constrained from buying exotic derivatives. The difference between CDS spreads and asset swap spreads is called the basis and should theoretically be close to zero. Basis trades attempt to exploit this difference to make a profit, however hedging a bond with a CDS does have irreducible risks which should be considered when making basis trades. History Conception Forms of credit default swaps had been in existence from at least the early 1990s, with early trades carried out by Bankers Trust in 1991. J.P. Morgan & Co. and economist Blythe Masters are widely credited with creating the modern credit default swap in 1994. In that instance, J.P. Morgan had extended a $4.8 billion credit line to Exxon, which faced the threat of $5 billion in punitive damages for the Exxon Valdez oil spill. A team of J.P. Morgan bankers led by Masters then sold the credit risk from the credit line to the European Bank of Reconstruction and Development in order to cut the reserves that J.P. Morgan was required to hold against Exxon's default, thus improving its own balance sheet. Despite early successes, credit default swaps could not be profitable until an industrialized and streamlined process was created to issue them. This changed when CDS's began to be traded as securities from JPMorgan, an effort led by Bill Demchak where he and his team created bundles of swaps and sold them to investors. The investors would get the streams of revenue, according to the risk-and-reward level they chose; the bank would get insurance against its loans, and fees for setting up the deal. In 1997, JPMorgan developed a proprietary product called BISTRO (Broad Index Securitized Trust Offering) that used CDS to clean up a bank's balance sheet. The advantage of BISTRO was that it used securitization to split up the credit risk into little pieces that smaller investors found more digestible, since most investors lacked EBRD's capability to accept $4.8 billion in credit risk all at once. BISTRO was the first example of what later became known as