Explain how CDS can exploit mispricing between distinct markets, for example loans, bonds, equities and instruments linked to equity

CDS can exploit valuation gaps between markets. The basis is the CDS spread minus the bond's spread over the benchmark for the same maturity. A negative basis means the bond pays more than the CDS costs for the same credit risk, so buy the bond and buy protection, earning the difference while hedged; a positive basis suggests the reverse. Equity and credit can also disagree: an expected leveraged buyout raises default risk while lifting the share price, so buy protection and buy the shares. Other trades compare an index with its constituents, or loans with bonds of the same issuer. The trap is getting the direction of the basis trade backwards.