6. Consider the following news from Reuters:

1407 GMT [Dow Jones] LONDON—According to a large investment bank investors can boost yields using the following strategies:

a. In the strategy, sell 5-yr CDS on basket of Greece (9 bp), Italy (8.5 bp), Japan (4 bp), Poland (12 bp), and Hungary (16 bp), for 34 bp spread. Buy 5-yr protection on iTraxx Europe at 38 bp to hedge.

Trade gives up 4 bp but will benefit if public debt outperforms credit.

b. To achieve neutral or positive carry, adjust notional amounts—for example in the first trade, up OECD basket’s notional by 20% for spread neutral position.

c. Emerging market basket was 65% correlated with iTraxx in 2005, hence use the latter as hedge.