In this research piece, one of the trades on Page 31 is Pay EUR 5y2y-7y3y-10y5y. What is the meaning of this notation? I guess it is a fly trade on three forward rates, but it is confusing that the three rates have different starting dates (2y vs 3y vs 5y). What is the intuition behind choosing such flies?

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    $\begingroup$ They're set such that there‘s no overlap between the instruments. Each forward contains information that the others don‘t. $\endgroup$
    – oronimbus
    Jun 18 at 21:59

1 Answer 1


You can have a look at the fly in nordea.

It's the same logic, just different tenors. If you google paying the belly you also find info. Essentially, by selling the short- and long-term (the wings) of the yield curve and buying the medium term (the belly) at the same time, you gain if the medium-term rates increase relatively faster than rates on the other two.

Your research paper also has a similar strategy (10y5y-15y10y-25y5y) which is explained in more detail (exhibit 27).

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    $\begingroup$ Very odd notation. I traded these all the time, the rational in 2016 was that you wanted to be paid in anticipation of the a hiking cycle, but didn't want a negative carry: so pay the wings and receive the belly, notional neutral but DV01 positive. So floating coupons cancel out. You pay 0.5 times 5y fixed + 0.5 times 25y fixed whilst receiving 1 times 10y fixed (actually workoud out as positive carry in 2016), whilst you benefit from parallel shifts up, lose money on steepining or shifts down. Needless to say, that hiking cycle never arrived back then :) anyway, this was 5y/10y/25y fly. $\endgroup$ Jun 20 at 9:40

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