Questions:

1.Describe James Franey’s experience and training in fixed income arbitrage. What is the main strategies of his firm Kentish Town Capital

2.Describe the trading opportunity James Franey discovered on November 4, 2008.

3.Explain the “Risk Replacement” trade after the Lehman collapse.

4.What is the Val01 for each of the two Treasury securities (ignore financing cost)? Why does the long/short position (long/short ratio) x =1.13755 （1/x = 0.8791）?

5.Assume convergence of yields to the mid-point of 3.61% and 3.26%, what is the profit for a successful trading where the long position is a $1,000 face value bond? (Hint: it’s about $26 but can you calculate the exact amount?)

6.James Franey has committed $30 million risk capital to initiate the trading position. What is the expected profit if the yields of the two bonds converge to the mid-point?

7.In late November, yield spread has increased to 51 basis points, and James Franey has lost more than 20% on his initial $30 million risk capital. He chose to stop the loss and closed his position. Will you do the same？Explain.

8.On December 30, yield spread has dropped from a peak of 77 basis points to about 62 basis points. What is your recommendation to James Franey: resume the original trade? reverse the trade? or stay out of the trade?

9.What do you think are the causes of this arbitrage opportunity (mis-pricing of bonds)?