Returning to our earlier example of the German media and telecommunications issuer, the investor decides instead to position her portfolio for a steepening of the issuer’s credit curve using the CDS market. Details of on-the-run 5- and 10-year CDS contracts outstanding are as follows.

Describe an appropriate long–short CDS strategy to meet this goal assuming a €10,000,000 10-year CDS contract notional. Calculate the investor’s return if the 5-year spreads rise 10 bps and the 10-year spreads rise 20 bps.

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Issuer German Media & Telecoms Issuer German Media & Telecoms Issuer Tenor 5 years 10 years CDS Spread 130 bps 175 bps EffSpreadDurCDS 4.669 8.680