What is credit arbitrage?

Credit arbitrage refers to the strategy of borrowing money at a lower interest rate and then investing that capital in opportunities that yield a higher return. This process takes advantage of the difference in interest rates, allowing an investor to profit from the spread between the lower cost of borrowing and the higher return on the investments.

For example, if an investor can secure a loan at an interest rate of 3% and invest that money in a venture that returns 6%, the investor effectively earns a profit of 3% on the use of borrowed funds. This concept is fundamental in finance, as it illustrates how leveraging debt responsibly can enhance returns.

The other choices do not accurately describe credit arbitrage. Investing in high-risk stocks involves a different strategy where the focus is on selecting equities with higher volatility for potential high returns, but it does not explicitly involve the borrowing aspect. Trading commodities for profit focuses on market transactions of physical goods and their futures, which is distinct from the financing elements of arbitrage. Saving in a high-yield savings account is about earning interest on savings without any borrowing or active investment strategies involved.