Consider each period as six months. (Assume semiannual compounding). Given that : 1. No-arbitrage price of a
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Question:
Consider each period as six months. (Assume semiannual compounding).
Given that :
1. No-arbitrage price of a 3.8% coupon 3-year Treasury is 1044.722631,
2. The price of 3.8% coupon 3-year Treasury issue in the market to yield 2% is 1052.159288
Period | Spot Rate (%) |
1 | 1.0000 |
2 | 1.2500 |
3 | 1.5000 |
4 | 1.7500 |
5 | 2.0000 |
6 | 2.2500 |
What is an arbitrage opportunity here? what action would a dealer take and what would the arbitrage profit be if the market priced the 3.8% 3-year Treasury issue at the price you found? show the arbitrage strategy and the actual riskless earnings from this strategy.
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