Suppose yields at the long end of the Treasury curve: Issue Yield to Maturity 1.625% due...
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Suppose yields at the long end of the Treasury curve: Issue Yield to Maturity 1.625% due Aug 2031 1.711% 2.88% 3% due Aug 2051 Modified Duration (in yrs) 9.077 19.474 a. How would you, in 2021, bet on a flattening at the long end of the curve? (i.e., you believe the 10-30 yield spread will decrease.) [3 points] b. How would you make this bet so that you're protected against parallel shifts in either direction? What size relative position would you take in each security? [4 points] c. After setting up this trade, how can you lose money? [Hint: drawbacks of duration hedging] [2 points] Suppose yields at the long end of the Treasury curve: Issue Yield to Maturity 1.625% due Aug 2031 1.711% 2.88% 3% due Aug 2051 Modified Duration (in yrs) 9.077 19.474 a. How would you, in 2021, bet on a flattening at the long end of the curve? (i.e., you believe the 10-30 yield spread will decrease.) [3 points] b. How would you make this bet so that you're protected against parallel shifts in either direction? What size relative position would you take in each security? [4 points] c. After setting up this trade, how can you lose money? [Hint: drawbacks of duration hedging] [2 points]
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Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
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