8. Explain the logic behind the two following strategies using cash flow diagrams.

a. WestLB mortgage Pfandbriefe trade too tight. Sell the WestLB 3% 2009s at 5.4 bp under swaps and buy the zero risk weighted Land Berlin 2.75% 2010s at 2.7 bp under. (TMA)

b. The following quote deals with implied forward rates in the credit sector. Using proper diagrams explain what the trade is.

Implied forward CDS levels look high because shorter-dated CDS are currently too cheap to 5-year, says BNP Paribas. Using the iTraxx Main curve as reference gives a theoretical 3-year forward curve that shows 6-month and 1-year CDS both at 60 bp.

“In 3-years time, we find that 6-month and 1-year CDS are very unlikely to be trading above 60 bp.”

Take advantage through the 3-5-10-year barbell, buying iTraxx 3-year at 20.75 bp for EUR20M, selling iTraxx 5-year at 38 bp for EUR25M, and buying iTraxx 10-year at 61.25 bp for EUR7M.

The trade has a yearly carry of EUR32,000 for a short nominal exposure of EUR2M.