A 6% coupon 10-year bond with a par value 100 is selling at par and is deliverable
Question:
A 6% coupon 10-year bond with a par value 100 is selling at par and is deliverable against a futures contract that settles in 4 months. The current repo rate is 4% p.a. Assume the futures price is currently 100. Identify an arbitrage opportunity as in the above scenario and demonstrate how to implement a strategy to make profits from the arbitrage opportunity.
Part (b). Calculate the no-arbitrage price of the futures contract.
Part (c). You are a bond portfolio manager and implement a strategy to earn active returns by betting on the changes of interest rate. You expect the interest rate to decline after the next RBA board meeting. Describe what futures position you need to take in order to adjust the duration of your portfolio.
Advanced Accounting
ISBN: 978-0538480284
11th edition
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng