Question 2 Suppose a Barbell Butterfly is constructed as follows at t=0 Asset Liability 1 unit...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Question 2 Suppose a Barbell Butterfly is constructed as follows at t=0 Asset Liability 1 unit of 16 year zero 0.5 units of 2-year zero 0.5 units of 30-year zero Using the 8 percent yield curve, the following values are calculated: Market price of 2 year zero at t=0 is 10,000 Market price of 30 year zero at t=0 is 10,000 Market price of 16 year zero at t=0 is 10,000 Net Equity value at t=0 is 0 At the 8 percent yield curve level The duration convexity and theta of assets, liabilities and net equity are as follows: Asset Duration 1600 Convexity 452 Theta 889 Liability 1600 256 1068 Net Equity 0 196 -179 a. Sketch the performance profiles of assets and liabilities on the same graph as of t=0. Clearly label the axes and curves on this graph. Show on the graphs clearly and correctly all relevant values, such as delta, gamma and market values, Provide a short interpretation of the graph. (Hint: Sketch means that suppose you are in an interview and the interviewer gives you this question, paper, and a pen. You are asked to draw on paper by hand what the performance profiles would look like. You do not need to use a spreadsheet). b. Sketch the performance profile of net equity as of t-0. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. c. Sketch the performance profiles of assets and liabilities on the same graph as of t=1. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. d. Sketch the performance profile of net equity as of t=0 and t=1 on the same graph. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. e. Your answers to parts (a) through (d) must have highlighted a problem with the delta hedging strategy. State this problem and propose an alternative hedging strategy that will eliminate the problem you identified in parts (a) through (d). Question 2 Suppose a Barbell Butterfly is constructed as follows at t=0 Asset Liability 1 unit of 16 year zero 0.5 units of 2-year zero 0.5 units of 30-year zero Using the 8 percent yield curve, the following values are calculated: Market price of 2 year zero at t=0 is 10,000 Market price of 30 year zero at t=0 is 10,000 Market price of 16 year zero at t=0 is 10,000 Net Equity value at t=0 is 0 At the 8 percent yield curve level The duration convexity and theta of assets, liabilities and net equity are as follows: Asset Duration 1600 Convexity 452 Theta 889 Liability 1600 256 1068 Net Equity 0 196 -179 a. Sketch the performance profiles of assets and liabilities on the same graph as of t=0. Clearly label the axes and curves on this graph. Show on the graphs clearly and correctly all relevant values, such as delta, gamma and market values, Provide a short interpretation of the graph. (Hint: Sketch means that suppose you are in an interview and the interviewer gives you this question, paper, and a pen. You are asked to draw on paper by hand what the performance profiles would look like. You do not need to use a spreadsheet). b. Sketch the performance profile of net equity as of t-0. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. c. Sketch the performance profiles of assets and liabilities on the same graph as of t=1. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. d. Sketch the performance profile of net equity as of t=0 and t=1 on the same graph. Clearly label the axes and curves on this graph. Provide a short interpretation of the graph. e. Your answers to parts (a) through (d) must have highlighted a problem with the delta hedging strategy. State this problem and propose an alternative hedging strategy that will eliminate the problem you identified in parts (a) through (d).
Expert Answer:
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
Students also viewed these finance questions
-
Let A, B be sets. Define: (a) the Cartesian product (A B) (b) the set of relations R between A and B (c) the identity relation A on the set A [3 marks] Suppose S, T are relations between A and B, and...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
In a bank reconciliation, deposits in transit are: (a) deducted from the book balance. (b) added to the book balance. (c) added to the bank balance. (d) deducted from the bank balance.
-
Bill's utility function is U = 0.5 ln q1 + 0.5 ln q2. What is his compensated demand function for q1?
-
Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash...
-
Repeat Problem 9.4 without centering the regressors and compare the results. Which approach do you think is better? Data From Problem 9.4 Find the condition indices and the variance decomposition...
-
Sharp Motor Company has two operating divisionsan Auto Division and a Truck Division. The company has a cafeteria that serves the employees of both divisions. The costs of operating the cafeteria are...
-
A $1,000 par value bond that pays interest annually just paid $106 in interest. What is the coupon rate? Q2) A 09.60% coupon, 21-year annual bond is priced at $986. What is the current yield for...
-
1. (22 points). The following table depicts the unit labor requirements for the USA and Brazil to produce cloth and food. Unit labor requirement (hours/unit of production) Cloth (Qc) Food (Qf) Canada...
-
Discuss the pros and cons of using measures of leverage to assess whether a company faces financial distress?
-
Explain how you took cultural factors and diversity into account when making the assessment and recommending interventions.
-
As an individual, reflect on and discuss the importance of diversity in teams and the relationship of diversity to teams spread across a large area. What sort of cultural considerations should you...
-
Describe the differences between managerial and financial accounting. Describe the differences as they relate to the users of the information, the purpose of the information, and the time frame (past...
-
How the process of mixing investment assets among different types of investment products, such as cash, fixed income, equity, real estate, derivatives, private investments, and collectibles, is...
-
1. Sage County is a calendar-year governmental organization that has governmental-type funds and reports both fund financial statements and government-wide financial statements. Below is selected...
-
Archangel Corporation prepared the following variance report. Instructions Fill in the appropriate amounts or letters for the question marks in the report. ARCHANGEL CORPORATION Variance...
-
Ken (age 31) and Amy (age 28) Booth have brought you the following information regarding their income, expenses, and withholding for the year. They are unsure which of these items must be used to...
-
Laura is a single taxpayer living in New Jersey with adjusted gross income for the 2012 tax year of $35,550. Laura's employer withheld $3,300 in state income tax from her salary. In April of 2012,...
-
Russell (age 50) and Linda (age 45) Long have brought you the following information regarding their income and expenses for the current year. Russell owns and operates a landscaping business called...
-
For coordinates \(\left(x^{1}, x^{2} ight)\) and metric \(g=\operatorname{diag}\left(g_{11}, g_{22} ight)\), the Gaussian curvature is For a sphere with coordinates defined in the following figure,...
-
Consider the holonomic basis defined in Box 26.1 . Using that the tangent vector for a curve can be written \(t=t^{\mu} e_{\mu}=\left(d x^{\mu} / d \lambda ight) e_{\mu}\), show that Thus, \(g_{\mu...
-
The Lie bracket of vector fields \(A\) and \(B\) is defined as their commutator, \([A, B]=\) \(A B-B A\). The Lie bracket of two basis vectors vanishes for a coordinate basis but not for a...
Study smarter with the SolutionInn App