7. Consider the following news from Reuters: 1008 GMT [Dow Jones] LONDON—SG recommends selling 7-year 0–3% tranche protection versus buying 5-year and 10-year 0–3% protection. 7-year equity correlation tightened versus 5-year and 10-year last year. SG’s barbell plays a steepening of the 7-year bucket, as well as offering positive roll down, time decay, and jump to default. SG also thinks Alstom’s (1022047.FR) 3–5-year curve is too steep, and recommends buying its 6.25% March 2010 bonds versus 3-year CDS.

(a) What is a barbell? What is positive roll down, time decay?

(b) What is jump to default?

(c) Explain the logic behind SG’s strategy.