Suppose you short-sell a $100m 10-year on-the-run par treasury and buy an $100m 10-year off-the-run par treasury
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Question:
- Suppose you short-sell a $100m 10-year on-the-run par treasury and buy an $100m 10-year off-the-run par treasury to earn the yield spread in late 1997. At the time, the rates on these bonds were 6.03% and 6.18%, respectively, a spread of 0.15%. In six months, suppose the off-the-run yield stays the same and the on-the-run bond is now off-the-run. What is your profit over this period of time?
- The on- the-run treasury rate stays at 6.03% but immediately after you enter the strategy, the off-the-run spread jumps to 0.30%. What is the loss in market value of your position?
- In the scenario in #2, suppose you were holding $1m as collateral with your prime broker. Losses in value of your position are taken from this. If the losses exceed this, you will get a call for the remainder of the loss plus enough to get back to $1m. If you can not meet this call right away, your position will get closed out. How much more collateral would you need to come up with in this example?
Related Book For
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart
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