Example 1: Narrow spread Suppose the swap spread is currently 17 bps, which is narrow by historical standards. Design a strategy that anticipates a widening of the spread, given the following market conditions on 20 year swaps and 20 year T-Bonds, and term repos 'sWA,-6.94% r BOND-6.77% rREPO LIBOR-0.2% LIBOR 5.090 Tr 1. In what sense can this strategy be characterized as an arbitrage opportunity? 2. Is this strategy subject to interest rate risk? 3. What (if any) risks are there to this strategy? 4. What would happen if there were a massive "flight to quality"? 5. What is a "haircut", and does it affect the viability of the strategy