5.

a. Consider the following quote from Reuters:

The poor correlation between CDS and cash in Swedish utility Attentat (VTT.XE) is an anomaly and investors can benefit by setting up negative basis trades, says ING. 5-yr CDS for instance has tightened by approx. 5 bp since mid-May while the Attentat 2010 is actually approx. 1 bp wider over the same period.

Buy the 2010 bond and CDS protection at approx midas 1 27 bp. (MO)

i. Display this position on a graph with cash flows exactly marked.

ii. Explain the logic of this position.

iii. Explain the numbers involved. In particular, suppose you have 100 to invest in such a position, what would be the costs and expected returns?

iv. What other parameters may have caused such a discrepancy?