Butterfly Trade It is April 1, 2020. Consider the following Treasury yield curve:

Maturity Coupon Price

2-year 3/31/2022 2.00% 100-00

5-year 9/30/2025 3.50% 100-00

10-year 9/15/2030 4.75% 100-00

There are 2 portfolios, each with $100 Million market value.

Portfolio I: 5-year bullet.

Portfolio II: 2-year/10-year barbell.

1.) Today, you invest the $100 Million in each portfolio, so that the portfolios have the same duration. The trades settle tomorrow. How much is invested in the 2-year and in the 10-year?

2.) Suppose you believe that 9 months from today the 2-year yield will be 50 basis points higher and the 10-year yield will be 25 basis points lower.

a.) Which strategy outperforms on a total rate of return basis?

3.) Discuss the issues/complexities involved with solving question #2.

This is all the information that's given.

Answer rating: 100% (QA)

Answer Solution Since both the portfolio have same duration ie 5 Year... View the full answer